What is a contra asset account and provide an example?

• A. An asset account that increases the related asset; example: Inventory
• B. An asset account that increases the related asset; example: Accumulated Depreciation increasing assets
• C. An asset account that reduces the related asset balance; example: Allowance for Doubtful Accounts reducing Accounts Receivable
• D. An asset account that has no effect on other assets; example: Prepaid Insurance

Answer: (C)

Contra asset accounts offset the balance of a related asset on the balance sheet. They carry a credit balance and reduce the net book value of the asset. A common example is Allowance for Doubtful Accounts, which reduces Accounts Receivable to reflect expected uncollectible amounts. In contrast, regular asset accounts (like Inventory) increase the asset, and other options that don’t offset the asset (such as Prepaid Insurance) aren’t contra assets. Accumulated Depreciation is another typical contra asset, reducing the carrying value of fixed assets like Equipment.