Question

Which of the following would be recorded as a contra asset? Select one:

a. Sales return and allowance

b. Prepayments

c. Accumulated depreciation

d. a. and c.

e. All of the above

Answer 1

The purpose of contra asset is to reduce the balance in its paired asset account. The asset value needs to be distributed to income statement over the years. The accumulation of such distribution is the nature of contra assets. These are called contra as normal assets may have debit balance and contra asset shall have credit balance. These are also popularly called negative asset as they are subtracted from the asset value in balance sheet.

From above options, only accumulated depreciation is used to reduce the balance of fixed asset. This is the primary nature of any contra asset.

Hence, the correct option is c. Accumulated depreciation.