Contra Account
An account that offsets the balance of a related account.
Definition
A contra account has the opposite balance type of the account it offsets. For example, "Allowance for Doubtful Accounts" is a contra-asset account that reduces Accounts Receivable to reflect estimated uncollectible invoices.
Common contra accounts include: Accumulated Depreciation (offsets fixed assets), Sales Returns and Allowances (offsets Revenue), and Discount on Bonds Payable (offsets Bonds Payable).
Why It Matters
Contra accounts preserve the original account balance while showing reductions separately. This provides transparency: Accounts Receivable shows total invoiced, while Allowance for Doubtful Accounts shows estimated bad debt—giving both gross and net figures.
Understanding contra accounts is essential for reading financial statements. Net values (after contra accounts) represent the true economic value, but gross amounts provide important context.
Examples
- 1
Accounts Receivable $100,000, Allowance for Doubtful Accounts ($5,000) = Net Receivable $95,000.
- 2
Equipment $50,000, Accumulated Depreciation ($20,000) = Net Book Value $30,000.
- 3
Sales Revenue $500,000, Sales Returns ($10,000), Sales Discounts ($5,000) = Net Sales $485,000.
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