What is a Contra Account?


Contra Account

Contra account is an account which is used to reduce or offset the value of an associated account. It holds opposite sign for a particular type of account.

If an account has debit balance (e.g for an Asset a/c), then there will be a credit balance in its contra account. The opposite is true for a liability account.

It is shown on a company’s balance sheet. It can be used for any type of account such as asset, liability, capital, revenue.

 

Examples of Contra Account

  • Drawings Account
Account Balance
Capital Account Credit
Drawings Account (Contra) Debit

 

An example where drawings account is a contra a/c linked to company’s capital account.

 Account Balance
Capital Account 2,00,000
Drawings Account (50,000)
Net Capital 2,00,000 + (50,000) = 1,50,000

 

  • Plant and Machinery Account
Account Balance
Asset Account Debit
Accumulated Depreciation Account (Contra) Credit

 

An example where accumulated depreciation account of plant and machinery is a contra a/c account linked to company’s plant and machinery.

Account Balance
Plant and Machinery Account 5,00,000
Accumulated Depreciation Account (60,000)
Book Value of Plant and Machinery 5,00,000 + (60,000) = 4,40,000

 

Uses of Contra Account

  • It is used to offset another account, for instance, debtors have a debit balance of 50,000 however the associated contra account i.e. “provision for doubtful debts” has a credit balance of 10,000. The net numbers for debtors would be (50k-10k) = 40,000.
  • It is also used to correct errors made with 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.

 

>Read Control Account



 

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