What is Contra Account?
A Contra Account carries a balance (i.e. debit or credit) that offsets the normal account, thereby reducing the paired account’s value.
Contra Account Definition in Accounting
Debit-Credit Journal Entry
The normal balances and impact on the carrying value are as follows:
- Asset → Debit Balance → Increase Asset Value
- Liability → Credit Balance → Increase Liability Value
- Equity → Credit Balance → Increase Equity Value
By contrast, contra accounts have the following balances and impact on an account’s carrying value:
- Contra Asset → Credit Balance → Reduction to Paired Asset
- Contra Liability → Debit Balance → Reduction to Paired Liability
- Contra Equity → Debit Balance → Reduction to Paired Equity
A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment.
On a company’s financial statements, the two items – the contra account and paired account – are often presented on a “net” basis:
- “Accounts Receivable, net”
- “Property, Plant & Equipment, net”
- “Net Revenue”
Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting.
Example Contra Account – Allowance for Doubtful Accounts
For instance, under U.S. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid).
Hence, the “Accounts Receivable, net” line item on the balance sheet adjusts for the allowance to display a more realistic value of A/R and the cash payments to be received, so investors are not misled or caught off guard by sudden decreases in a company’s A/R.
Contra Asset Journal Entry Accounting
|Accounts Receivable Account||$100,000|
|Allowance for Doubtful Accounts||$10,000|
Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R).
On the balance sheet, the “Accounts Receivable, net” balance would be $90,000.
- Accounts Receivable, net = $100,000 – $10,000 = $90,000
Types of Contra Accounts
Contra Asset, Contra Liability and Contra Equity
There are three distinct contra-accounts, as shown in the table below.
Contra Account Examples
The most common examples of contra-accounts are the following:
- Contra Asset: Accumulated Depreciation, Allowance for Doubtful Accounts
- Contra Liability: Financing Fees, Original Issue Discount (OID)
- Contra Equity: Treasury Stock
Contra Revenue Account
Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.
Contra revenue generally carries a debit balance, rather than the credit balance seen in normal revenue.
The most common contra revenue accounts are the following:
- Sales Discounts: The discounts offered to customers, most often as an incentive for customers to make early payments (i.e. to provide more liquidity and cash on hand for the company).
- Sales Returns: The return of a product from a customer, which can either be an “allowance” – similar to the doubtful accounts for A/R – or an actual deduction based on processed returns.
- Sales Allowances. The reduction in the sale price of a product due to quality defects or mistakes, in an effort to encourage the customer to keep a product with minor defects in exchange for the discount.