What is a contra account?

A contra account is a general ledger account that is used to reduce the value of the account related to it. Basically, a contra account is the opposite of its associated account. If the associated account has a debit balance, then the contra account would have a credit balance. They are used to maintain the historical value of the main account while all the deductions are recorded in the contra account, which when clubbed together show the net book value.

For example

if the cost of machinery was Rs. 50,000 and the company wants to preserve its original cost, then the accumulated depreciation of such machinery is recorded separately. Let’s say Rs 10,000 was the accumulated depreciation. Then such amount is recorded in the contra account named accumulated depreciation account. This makes the net value of the machinery Rs 40,000.

Types

There are various types of contra accounts such as contra asset, contra equity, contra revenue, and contra liability.

• Contra asset: these accounts have credit balances and are used to reduce the balance of an asset. Eg, Accumulated depreciation.
• Contra Liability: These accounts have debit balances and are used to reduce the balance of liabilities. Eg, discount on notes.
• Contra equity: These accounts have a credit balance and are used to reduce the number of shares outstanding which in turn reduces equity. Eg treasury stock.
• Contra revenue: These accounts have a debit balance. They reduce gross revenue which results in net revenue. Eg sales return.

Accountants make use of contra accounts instead of reducing the value of the actual account to keep the financial statements clean.