Contra Account

A contra account is an account that carries a balance opposite to the normal balance of the account type it belongs to, and that exists specifically to reduce the amount reported by a related, paired account. An asset account normally carries a debit balance, for instance, but a contra asset account carries a credit balance, and when the two are combined, the result is a smaller net figure than the paired account would show on its own.

Contra asset accounts are the most familiar example: accumulated depreciation is paired with a fixed asset's cost to produce the asset's book value, and allowance for doubtful accounts is paired with accounts receivable to produce its net realizable value. Contra liability accounts work the same way in reverse — discount on bonds payable carries a debit balance against the normally credit-balanced Bonds Payable account, reducing the liability's reported carrying amount. Contra equity accounts, such as a sole proprietor's drawing account or a corporation's treasury stock, carry debit balances that reduce total owner's or stockholders' equity. Contra revenue accounts, including sales returns, sales allowances, and sales discounts, carry debit balances that reduce gross revenue down to net sales, and contra expense accounts, though less common, carry credit balances that offset an otherwise normal debit-balance expense.

Recording a reduction in a separate contra account, rather than simply lowering the balance of the main account, preserves the original, gross amount of the main account for reference while still presenting readers with the correct net figure. Keeping accumulated depreciation separate from the asset's original cost, for example, lets anyone reading the balance sheet see both how much the asset originally cost and how much of that cost has been allocated to expense so far, information that would be lost if depreciation simply reduced the asset account's own balance directly.

On the balance sheet, a contra asset or contra liability account is typically shown directly beneath the account it offsets, with the net amount displayed as a subtotal — gross accounts receivable minus the allowance for doubtful accounts produces net accounts receivable, for instance. On the income statement, contra revenue accounts are subtracted from gross sales to arrive at net sales, which is the figure actually used as the starting point for the rest of the income statement. In every case, the contra account's balance moves in the opposite direction of a normal increase to the main account: an increase to accumulated depreciation, for example, further reduces the asset's net book value rather than increasing it.

Recognizing a contra account for what it is prevents a common source of confusion when reading a trial balance or chart of accounts, since a credit balance sitting among a list of otherwise debit-balanced asset accounts can look like an error until the contra relationship is understood. For analysts, the size of certain contra accounts relative to their paired account carries real information in its own right — a large allowance for doubtful accounts relative to gross receivables signals an aggressive estimate of expected collection problems, and heavily accumulated depreciation relative to an asset's original cost signals that the asset is nearing, or past, the end of its useful life.