Contra Account

Quick Summary of Contra Account

A Contra account is an account that appears as a subtraction from another account on balance sheet of a company. For example, provision for bad debts is a contra account of accounts receivable. Accounts receivable is the main account with a debit normal balance and provision for doubtful debts is an account with credit normal balance which offsets the main account.

In an accounting system, ledger accounts are designed to contain similar classes of transactions. But for presentation purposes it is sometimes necessary to show net balance of two accounts. For example, there need to be separate accounts to hold the actual cost of property, plant and equipment and related accumulated depreciation. If we record depreciation related adjustments in the cost accounts we will lose key information about the original cost of the assets and accumulated depreciation. To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts. However, it will be meaningless to show the property plant and equipment cost account and the related accumulated depreciation account separately on the balance sheet. We need to show the net book value of the property plant and equipment which equals the cost of PPE offset by related accumulated depreciation which is a contra account.

An account which offsets another account. A contra-asset account has a credit balance and offsets the debit balance of the corresponding asset. A contra-liability account has a debit balance and offsets the credit balance of the corresponding liability.

The account is an income account that is expected to hold a balance opposite to what is normally expected, to counteract the balance in another income account. Accumulated Depreciation, used to diminish the value of an asset over time, is another example of a contra-account.

GAAP requires that an allowance must be made for bad debts. An estimate must be made on some kind of percentage basis. Credit a contra-account “Allowance for Bad Debts” on the Balance Sheet. Debit Bad Debt Expense.

A contra-account is a balance sheet account whose purpose is to reduce the amount of another account. That is why asset contra-accounts have credit balances while liability contra-accounts have debit balances. “Contra” is a Latin word that means “against”.

Professional firms like Law Firms or even accounting firms may use an account called “Unbilled Accounts Receivable’. This is for work they’ve racked up but aren’t ready to bill the clients yet. The offset account is a liability account “Unearned Revenue”.

Asset account that offsets an associated account. For example, accumulated depreciation account that reduces the original cost of an asset to arrive at its book value. Also called contra asset or valuation allowance.

Here are some examples:

• Asset contra accounts. Accounts Receivable has a debit balance; its contra account, Allowance for Doubtful Accounts, has a credit balance. Equipment has a debit balance; its contra account, Accumulated Depreciation–Equipment, has a credit balance.
• Liability contra accounts. Bonds Payable has a credit balance; its contra account, Discount on Bonds Payable, has a debit balance.
• Owners’ equity contra accounts. Most owners’ equity accounts have a normal credit balance, but Treasury Stock has a debit balance and is treated as a contra account to total Owners’ Equity (rather than to a particular account). Dividends Declared has a debit balance and is a contra account to Retained Earnings.
• Revenue contra accounts. Sales has a credit balance; its contra accounts, Sales Discounts and Sales Returns and Allowances, have debit balances.
• Expense contra accounts. Purchases has a debit balance; its contra accounts, Purchase Discounts and Purchase Returns and Allowances, have credit balances.

When Correct Account Balances May Not Be Normal Generally, an account balance that is not normal is incorrect, but there are exceptions. For example, if a company overdraws its bank account, the Cash account (normal debit balance) will have a temporary credit balance.

Similarly, if bills are overpaid, Accounts Payable (normal credit balance) may have a temporary debit balance. If a company is operating at a loss, Retained Earnings (credit balance) may have a debit balance. Eying the Trial Balance When reviewing the trial balance for errors, the first step is to eye the accounts to see that each account’s balance is in the proper debit or credit column.

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