Contra Account

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.

 

Example 1

 Account  Balance
 Capital Account  Credit
 Contra – Drawings Account  Debit

 

Example 2

 Account  Balance
 Asset Account  Debit
 Contra – Accumulated Depreciation Account  Credit

 

Uses of a Contra Account

  1. 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.
  2. It is also used to correct errors made in an account.
  3. 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.