Definition: A contra account is an account linked to another account with an opposite reporting balance designed to reduce the amount in the other account. What does that mean? Basically, a contra account is a general ledger account that carries an opposite balance from the rest of the accounts in its type. These accounts are used to reduce regular accounts’ balances.
Let’s take a look at an example.
Let’s look at asset accounts first. Assets have a debit balance. This means that entries recorded on the left side of the T-account will increase the asset balance and entries recorded on the right side will decrease it. Contra asset accounts have a balance that is opposite from the regular asset accounts. In other words, a contra asset account maintains a credit balance instead of a debit balance.
Accumulated depreciation is a good example. It carries a credit balance and is linked to the fixed asset account, which carries a debit balance. The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period. This difference is shown on the balance sheet.
Assets aren’t the only account type that has contra accounts. Equity and liability accounts both have contra accounts as well. Take expense accounts for example. Expense accounts are technically contra equity accounts because they are linked to another equity account, revenue, and maintain an opposite balance. Regular equity accounts, like revenue, maintain a credit balance. The expense account uses its debit balance to reduce the revenue account’s credit balance.
What Does Contra Account Mean?
Contra accounts are a little tricky to think about when you are first starting out. Just remember that they carry an opposite balance than the other accounts in their account type. Also each contra is always linked to a regular account.