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    Controller Library Value Pack
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    Accounting Standards Library
    Tuesday
    Mar192013

    What is a contra account?

    Contra Account Overview

    A contra account offsets another, related account with which it is paired. If the related account is an asset account, then the contra asset account is used to offset (reduce) it with a credit balance. If the related account is a liability account, then the contra liability account is used to offset (increase) it with a debit balance.

    The Contra Asset Account

    The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. The fixed asset account contains the original acquisition cost of a number of fixed assets, while the contra account (accumulated depreciation) contains the sum total of all the depreciation expense that has been charged against those assets over time. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.

    The Contra Liability Account

    The contra liability account is less common than the contra asset account. An example of a contra liability account is the bond discount account, which offsets the bond payable account. The two accounts together yield the carrying value of the bond. A contra liability account is not classified as a liability, since it does not represent a future obligation.

    The Contra Equity Account

    Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.

    The Contra Revenue Account

    Contra revenue is a deduction from gross revenue, which results in net revenue. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are:

    • Sales returns. Contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods.
    • Sales allowances. Contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales.
    • Sales discounts. Contains the amount of sales discount given to customers, which is usually a discount given in exchange for early payments by customers.

    Contra Account Examples

    Here are several examples of contra accounts, as they would be presented in the balance sheet:

    Accounts receivable $1,000,000
      Less: allowance for doubtful accounts (50,000)
    Net accounts receivable $950,000

     

    Inventory $2,500,000
      Less: Reserve for obsolete inventory (80,000)
    Net inventory $2,420,000

     

    Fixed assets 10,000,000
      Less: Accumulated depreciation (8,500,000)
    Net fixed assets $1,500,000


    The balances in contra accounts are reduced when the assets or liabilities with which they are paired are disposed of. Thus, when a fixed asset is sold, the accumulated depreciation associated with it is reversed. Otherwise, the balances in the various contra asset accounts would continue to increase over time.

    Related Topics

    Allowance for doubtful accounts
    What is an inventory reserve?
    What is contra revenue?
    What is the normal balance for an account?

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