A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation of these items is reflected on the balance sheet.
All balance sheet accounts can have corresponding contra accounts. Generally, such accounts are subdivided into three groups:
- Contra Asset: an account which has a credit balance that is used to offset (deduct from) an asset account.
- Contra Liability: an account which has a debit balance that is used to offset (deduct from) a liability account.
- Contra Equity: an account which has a debit balance that is used to offset (deduct from) an equity account.
Allowance for Doubtful Accounts, Accumulated Depreciation, and Valuation Allowance for Marketable Securities are contra asset accounts; while Discounts on Bonds Payable is an example of a contra liability account. Treasury stock and drawing accounts are examples of contra equity accounts.
Company A’s balance sheet indicates accounts receivable of $4,292,300 and an allowance for doubtful accounts of $425,300. The net receivables of Company A, as shown on the balance sheet, would be:
|Less: Allowance for Doubtful Accounts||$425,300|
|Net Accounts Receivable||$3,867,000|