Contra accounts definition
/What are Contra Accounts?
A contra account offsets the balance in another, related account with which it is paired. The natural balance of a contra account is the reverse of the related account in the pairing. Thus, if the related account has a natural debit balance, then the associated contra account has a natural credit balance. If the related account is an asset account, then a contra asset account is used to offset it with a credit balance. If the related account is a liability account, then a contra liability account is used to offset it with a debit balance.
Presentation of Contra Accounts
Contra accounts appear in the financial statements directly below their paired accounts. Sometimes the balances in the two accounts are merged for presentation purposes, so that only a net amount is presented.
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The Contra Asset Account
The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. The fixed asset account contains the original acquisition cost of a number of fixed assets, while the contra account (accumulated depreciation) contains the sum total of all the depreciation expense that has been charged against those assets over time. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.
The Contra Liability Account
The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. The two accounts together yield the carrying value of the bond. A contra liability account is not classified as a liability, since it does not represent a future obligation.
The Contra Equity Account
Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.
The Contra Revenue Account
Contra revenue is a deduction from gross revenue, which results in net revenue. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are:
Sales returns. Contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods.
Sales allowances. Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales.
Sales discounts. Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers.
Examples of Contra Accounts
Here are several examples of contra accounts, as they would be presented in the balance sheet:
| Accounts receivable | $1,000,000 |
| Less: allowance for doubtful accounts | (50,000) |
| Net accounts receivable | $950,000 |
| Inventory | $2,500,000 |
| Less: Reserve for obsolete inventory | (80,000) |
| Net inventory | $2,420,000 |
| Fixed assets | 10,000,000 |
| Less: Accumulated depreciation | (8,500,000) |
| Net fixed assets | $1,500,000 |
The balances in contra accounts are reduced when the assets or liabilities with which they are paired are disposed of. Thus, when a fixed asset is sold, the accumulated depreciation associated with it is reversed. Otherwise, the balances in the various contra asset accounts would continue to increase over time.