If an asset is something that adds value or has potential future value to a firm, then why is a contra asset an asset? For example accumulated depreciation that decreases plant property and equipment, why is accumulated depreciation an asset? Is this just an accounting rule? Is all contra assets just considered assets and all contra category x consided category x? Thanks
Here’s a simplistic look at it. I purchase a building for $100 and assume that it will be depreciated over ten years using straightline. I need my original asset to be recorded on the books at my cost. The purchase: Debit - PPE $100 Credit - Cash $100 Depreciation- Year 1: Debit - Depreciation Expense $10 Credit - Accumulated Depreciation PPE - $10 At the end of the first year my PPE account shows the $100 purchase and the contra account shows the $10 in accumulated depreciation which gives me a nbv of $90. Simple?
Contra asset by the definition is an “opposite asset”. Since you are showing the Historic purchase value of the Asset - and also need to determine what its “current” running total balance is – the two show up next to each other. The Balance sheet otherwise will show a continuous balance of 100$ using brianr’s example - if the Accum. Depreciation shows up alongside and below the PP&E – you know what is the true asset value of the PP&E e.g.