An account which is used to reduce or offset the value of an associated account is called a Contra Account. A contra account holds the opposite of normal balance that is actually shown by a particular type of an account. If an account has a debit balance (e.g for an Asset a/c), then there will be a credit balance in a contra account. The opposite is true for a liability account.
Most contra accounts are shown on a company’s balance sheet. A contra account can be used for any type of an account such as asset, liability, capital, revenue.
|Contra – Drawings Account||Debit|
|Contra – Accumulated Depreciation Account||Credit|
Uses of a Contra Account
- It is used to offset another account, for instance debtors has debit balance of 50,000 however its contra account “provision for doubtful debts” has a credit balance of 10,000. The net debtors would be 40,000.
- It is also used to correct errors made in an account.
- It helps to make financial records transparent. Simply looking at the accounting records of a given business, one can reach back to the history related to certain debits and credits.