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Why is the allowance for doubtful account balance considered a contra-asset?

The reason is because the allowance for doubtful account balance will always be negative and reduces assets. Its not necessary considered a liability because the company will not have to pay cash out for the negative asset.

The purpose of the allowance is to properly state gross accounts receivable at the net realizable value (i.e. the expected value that will be actually collected).

As you can see in the visual below, gross accounts receivable and the allowance for doubtful account should always be added together to get accounts receivable net (i.e. the net realizable value).


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