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Contra account - What is a contra account?

Contra accounts are used in order to offset the balance of a related account so that a company can account for different amounts for an entry

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A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible.

Types of contra accounts

A contra account is not designated to a particular paired account. Contra accounts can be used to offset a series of different types of accounts.

The most common type of contra account is the contra-asset account. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation.

If an asset is sold, then the amounts present in the contra-asset accounts due to depreciation are reversed so that they do not continue to increase over time now that the asset is no longer in the possession of the business.

Other types of contra accounts include:

  • Contra revenue account, which is used to record the net amounts and usually has a debit balance, as opposed to the revenue account that records the gross amounts.
  • Contra liability account, which is rather uncommon. An example would be a contra liability account which would be debited to offset a regular liability account.
  • Contra equity account, also less common and involves the funds a business uses to buy back their stock.

A contra account in practice

There are many situations where one account is used to offset another account. One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account.

The one important difference: assets are debited when increased, and contra-assets are credited when increased.

In this way, an accumulated amortisation account offsets a related asset account (which is recorded as a debit). The contra-asset account is neither an asset nor a liability.

Contra accounts increase transparency

By understanding the concept of a contra account, it is possible to simply look at the accounting records of a given corporation and turn back through the financial history related to certain debits and credits in the records in order to gain an understanding of how they are related.