What is a Contra Account?
Contra Account is an opposite entry which offsets the original value of a related account in the ledger. It is an entry that is contrary to an original account. It is linked with another account and has an opposite balance.
- It is a general ledger account with a purpose to have its balance to be the opposite of the original balance for that account. It is linked to specific accounts and is reported as reductions from these accounts.
- The transactions made in this account are reported on a company’s financial statements directly under the related account.
- The usual pattern for a Contra Account is Gross Amount – (Amount in the Contra Ac) = Net Amount
List of Contra Accounts
These accounts can be listed on the basis of the respective asset, liability or equity account to reduce their original balance.
Below is the list of contra accounts you should be aware of –
#1 – Contra Asset Account
An asset that is recorded as a credit balance is used to decrease the balance of an asset. The balance of a contra asset account is a credit balance. This account decreases the value of a fixed asset. This account is not classified as an asset since it does not represent a long term value. It is not classified as a liability since it does not represent a future obligation.
These contra asset accounts examples include
- Allowance for doubtful accounts – Allowance for doubtful accounts is the percentage of bad debts that are estimated from the Accounts receivable account. This contra asset account offsets a company’s accounts receivable account.
- Accumulated Depreciation – Depreciation is the reduction in the value of an asset. Accumulated depreciation represents the cumulative amount of depreciation that is incurred by an asset. This account offsets a company’s real property assets that include machinery, furniture and buildings, etc. Accumulated depreciation reduces the value of an asset.
#2 – Contra Liability Account
A liability that is recorded as a debit balance is used to decrease the balance of a liability. The balance of a contra liability account is a debit balance. This account decreases the value of the liability. Contra Liability a/c are not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation.
The examples of contra liability account include:
- Discount on bonds payable – This is the difference between the amount of cash a company receives when issuing a bond and the value of the bond at maturity. The value of a bond is reduced by Discount on bonds payable.
- Discount on notes payable – The discount offered on the liability that is created when a company borrows a specific amount of money and repays it early. Discount on notes payable reduces the total amount of the note to reflect the discount offered by the lender.
#3 – Contra Equity Account
Equity that is recorded as a debit balance is used to decrease the balance of a standard equity account. It is a reduction from equity because it represents the amount paid by a corporation to buy back its stock. The contra equity account reduces the total number of outstanding shares. The treasury stock account is debited when a company buys back its own shares from the open market.
#4 – Contra Revenue Account
A reduction from gross revenue which results in net revenue is the contra revenue account. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduces the total amount of a company’s net revenue.
The examples of contra revenue account include:
- Sales Returns- Sales returns is a Contra Ac of the sales account. This transaction is recorded when a customer returns the goods for which a payment was made and a refund needs to be given.
- Sales Allowances- Sales allowances is also a part of the sales account. Sales allowance is the reduction in the selling price when a customer agrees to accept a defective unit instead of returning it to the seller.
- Sales Discounts – Sales discounts are offered on sales of goods to attract buyers. It is an incentive to purchase the goods.
Debit or Credit Contra Accounts
As you know from studying the basics of debt and credit, balance sheet accounts have a normal balance.
- Assets accounts have a debit balance. Contra assets accounts have a credit balance.
- Liabilities accounts have a credit balance. Contra liabilities have a debit balance.
- Equity accounts have a credit balance. Contra equity have a debit balance.
- Revenue accounts have a credit balance. Contra revenues have a debit balance.
Why Contra Accounts are Important?
Contra Account enables a business to record the original value on the general ledger along with any reduction in the value. It enables to see the original historical value of the assets along with the associated accumulated depreciation. Its facilitate easy retrieval of the original amount and the actual decrease which helps in understanding the net balance. It allows a business to present the net value on the basis of the reduction made on the original amount.
This has been a guide to Contra Account. Here we discuss the list of contra accounts including Assets, Liability, Equity and Revenue along with examples. You can learn more about accounting from the following articles –