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
|Drawings Account (Contra)||Debit|
An example where drawings account is a contra a/c linked to company’s capital account.
|Net Capital||2,00,000 + (50,000) = 1,50,000|
- Plant and Machinery Account
|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.
|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.
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