A contra-asset account has what effect on the related asset?

• A. Reduces the asset balance
• B. Increases the asset balance
• C. Has no effect
• D. Converts it to a liability

Answer: (A)

A contra-asset account is used to offset the related asset, so it reduces the asset’s net value on the balance sheet. It carries a credit balance, opposite to the asset’s normal debit balance, which is why it diminishes what is shown as the asset.

For example, depreciation accumulates against equipment. If equipment cost is 100,000 and accumulated depreciation is 20,000, the net book value of the equipment is 80,000. The contra-asset (accumulated depreciation) lowers the asset figure, not increases it and not creating a liability.

So the effect is to reduce the related asset balance.