A contra equity account is a type of contra account that sits in the equity section of the balance sheet but carries a debit balance, reducing total equity. It is the same thing as a contra owner's equity account, the name more often used for sole proprietorships and partnerships.
Treasury stock and drawings
In a corporation, the main contra equity account is treasury stock, which records shares the company has bought back from its shareholders and not retired. Suppose a company repurchases 1,000 of its own shares at $25 each. Under the cost method, it debits Treasury Stock $25,000 and credits Cash $25,000. The $25,000 is then shown as a deduction from total stockholders' equity, not as an asset, because a company cannot own itself. If the shares are later resold for more than cost, the excess is credited to additional paid-in capital, not reported as a gain.
In a sole proprietorship, the owner's drawing account works in a similar way. When the owner takes $3,000 out of the business for personal use, the entry is a debit to Drawings and a credit to Cash. Drawings reduce the owner's capital, but unlike treasury stock they are a temporary account, closed to the capital account at the end of each year. Some texts also treat a debit balance in accumulated other comprehensive income, such as unrealized losses, as contra equity, although it is really a normal equity account with a negative balance.