Which statement about a contra-asset is true?

• A. A contra-asset increases the asset's carrying amount.
• B. A contra-asset reduces the related asset's carrying amount.
• C. A contra-asset is a liability.
• D. A contra-asset increases equity.

Answer: (B)

A contra-asset account is used to offset the related asset on the balance sheet, so it reduces the asset’s carrying amount. It carries a credit balance, opposite to the asset’s normal debit balance, and is shown subtracting from the asset to arrive at net book value. This is why the correct statement is that a contra-asset reduces the related asset’s carrying amount.

For example, accumulated depreciation lowers the carrying amount of property, plant, and equipment, and the allowance for doubtful accounts lowers accounts receivable to reflect expected uncollectible amounts. These accounts are not liabilities and they do not increase equity; they specifically serve to reduce asset values on the financial statements.