Contra asset account
| Contra asset account |
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Contra asset account in accounting is a type of account in which a credit balance prevails over a debit balance. In practice, additions registered on contra asset account are put on in the second coulmn (the right side) (Masoom 2013, p. 177). Each debit account is related to another credit account so that asset accounts have their contra asset account equivalents (carrying value). The characteristic feature of a contra asset account is decreasing the final value accomplished in the settlement. The name of this accounts relates to the word against, which has the same meaning as the word contra. It points out to the fact that every account of this type is in opposition to another – asset account. This explanation clarifies also the aspect of value reduction in the case of every contra account. Contra asset account is one of four used in accounting. Apart from this type, there exist also: liability, equity and revenue types.
Examples
Some examples of operations in which the contra asset account is used are:
- Bank loan default - an example of usage of this type of account is the situation of bank loan default. The income is than left on the side of assets, in opposition to eventual loss (Mallett 2012, p.2.).
- Sales and leaseback gains - in the analysis of Robert Sprouse, a contra-account with no accounts as contraposition under ABP 1964b is a category for sale and leaseback gains (Swieringa 2011, p. 212.).
- Certificates - the contra asset account seems to be the right solution also as a way of accounting classification of – exemplary – Sukuk certificate. Unlike another solution, this one combines including the assets in the balance sheet and emphasize the fact that the true owners of the asset are Sukuk holders (Biancone, Shakhatreh 2016, p. 102-103.).
- Allowance for doubtful accounts position - classical example of contra asset account use.
Contra-asset approach
Contra-asset approach could be treated as an alternative for all-inclusive income approach in the situation of a dangling credit. In this case, the credit is perceived as contra-assetand registered in connection with intangible assets (Graham 2015, p.66.). This gives the possibility of recording individual net assets on the market. At the same time, the procurement is cost-valued. When a situation of unreliable values of an acquired firm occurs, those uncertain assets are registered at the contra-asset account. Any higher sum than at the contra account is perceived as company's loss. The contra-asset approach requiring annual control and thorough reporting is nowadays seen as quite conservative in comparison with the current regulations and with the alternate solution – all-inclusive income approach. On the other hand, it may prove to be worth considering for companies seraching for modern solutions, that are relatively safe at the same time.
References
- Biancone, P., Shakhatreh, M. Z. (2016). [https://dergipark.org.tr/download/article-file/303958 Accounting Issues in Sukuk Issuance. „International Journal of Islamic Economics and Finance Studies”, 30(70), 103-105.
- Gaharan, C. (2015). Reporting Standards for Bargain Purchase Gain: Is the Objective Achieved?. „Journal of Accounting and Finance”, 15(8), 66-68.
- Mallett, J. (2012). Description of the operational mechanics of a Basel regulated banking system. „arXiv preprint”, 1204.1583, 2-12.
- Masoom, K. (2013). The Entrepreneur’s Dictionary of Business and Financial Terms. Partridge Publishing Singapore.
- Swieringa, R. J. (2011). Robert T. Sprouse and fundamental concepts of financial accounting. „Accounting Horizons”, 25(1), 212-216.
Author: Joanna Możdżeń
