Definition
A contra account carries a balance opposite to the account it is paired with and reduces it on the financial statements. Accumulated depreciation, for example, has a credit balance that reduces the cost of fixed assets. Contra accounts keep the original amount visible while still reporting the net figure.
How it works
Using a contra account rather than reducing the main account directly preserves information. The balance sheet can show equipment at cost of 50,000 less accumulated depreciation of 20,000, rather than just 30,000, which tells readers how old the assets are.
Common examples: contra assets (accumulated depreciation, allowance for doubtful debts, inventory write-down allowance), contra revenue (sales returns, sales discounts) and contra liabilities (discount on bonds payable). Each has the opposite normal balance of its partner.
In a chart of accounts, place each contra account directly under the account it reduces and flag it as contra so totals and ratio calculations treat it correctly.
Example: allowance for doubtful debts
Receivables of 45,000 are expected to include 2,000 that will not be collected. The allowance (a contra asset) reduces receivables to a net 43,000 without writing off any specific customer yet.
| Account | Debit | Credit |
|---|---|---|
| Bad debt expense | 2,000 | |
| Allowance for doubtful debts (contra asset) | 2,000 |