Contra account

Definition

Contra accounts are accounts used in accounting to reduce the value of related accounts. They have a normal balance opposite that of the related account, such as a credit balance for an asset account or a debit balance for a liability account.

5 Must Know Facts For Your Next Test

1. Contra accounts are often used to track depreciation, allowances for doubtful accounts, and sales discounts.
2. The most common contra asset account is accumulated depreciation which reduces the book value of long-term assets.
3. Contra revenue accounts, like sales returns and allowances, reduce total revenue on the income statement.
4. A contra liability account might include discount on bonds payable, which reduces the total amount owed.
5. Understanding contra accounts is crucial for accurate financial reporting as they provide transparency into reductions in asset values and revenue.

Review Questions

Related terms

Accumulated Depreciation:

A contra asset account that records the total depreciation expense over the life of an asset.

Allowance for Doubtful Accounts:

A contra asset account used to estimate uncollectible receivables.

Sales Returns and Allowances:

A contra revenue account that records returns from customers and allowances granted for defective goods.