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Definition of 'Contra Account'
An account on a corporation or entity's financial statements that offsets the balance of a related and corresponding account. A contra account is found on financial statements as an offsetting account to represent the financial flip-side of a figure/asset/liability for book-keeping purposes. Contra accounts typically represent the offsetting nature of debits and credits on a company's financials.
A prime example of a contra account would be accumulated amortization. This sort of contra asset account would credit the amortization account in order to offset the debit position to give a more accurate indication of the actual balance of the asset and its useful life on the company's financial statements. This can be used to give a clearer picture on valuation changes.
A Contra Account offsets another related or associated account with which it is paired. Contra Accounts are set up for the purpose of offsetting the balance of an associated account.
If the related account is an asset account, then the contra asset account is used to offset it with a credit balance. If the related account is a liability account, then the contra liability account is used to offset it with a debit balance. Contra account is an account that appears as a subtraction from another account on balance sheet of a company.
For example, provision for doubtful debts is a contra account of accounts receivable. Accounts receivable is the main account with a debit normal balance and provision for doubtful debts is an account with credit normal balance which offsets the main account. The other most common contra account is the accumulated depreciation account, which offsets the fixed asset account.
They are control accounts or suspense accounts used for a special purpose like the intercompany accounts.
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