What is Contra in Accounting?

What is contra in accounting? This question is asked by many students, accountants, and professionals. This article will give you the definition of contra in accounting, talk about different contra accounts, and give examples.

We will look at the following different contra accounts and give examples:

• Contra asset accounts
• Contra liability account
• Contra revenue account
• Contra equity account

Definition of a Contra Account

They are usually subcategory accounts linked to an account on the balance sheet. Contra accounts are used to offset each other and reduce the gross amount. For example, a contra accumulated depreciation account can offset a fixed asset.

We will now look in detail at some of the different contra accounts that are used:

Contra Asset Accounts

A contra asset account is an account that is used to offset another fixed asset account on the balance sheet. Contra asset accounts are typically used for accumulated depreciation, amortisation, and other accounting adjustments. For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost.

The contra asset account would be used to offset the equipment account on the balance sheet. It would give a more accurate picture of the company’s fixed assets.

Contra Assets Account Example

The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost. The contra asset account would be used to offset the equipment account on the balance sheet. This would give a more accurate picture of the company’s assets. For example, if the company purchased a computer for 1,000 and it had a five-year life expectancy using straight-line depreciation, the contra account would be debited for 200 each year (the 1,000 divided by 5 years). It would reduce the net income by 200 each year.

Below is the asset account debit balance and accumulated depreciation account credit balance on the balance sheet.

Allowance for Doubtful Accounts

An allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet. This account is used to estimate the amount of money that is not likely to be collected from customers.

The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position.

Allowance for Doubtful Accounts Example

Company X has an Accounts Receivable balance of 10,000. The company estimates that it will not be able to collect 1,000 from its customers. The allowance for doubtful accounts is a contra asset account that is used to offset Accounts Receivable on the balance sheet.

In this example, the accounts receivable is 10,000, and the allowance for doubtful debt contra account is 1,000, leaving a balance of 9,000.

Contra Revenue Accounts

Revenue is shown on the income statement as a credit, it is the amount of revenue a business earns in a period. It might be important for a business to track the full cost of sales less contras to see the full picture.

There might be several different contra revenue accounts that a business might use, including:

• Sales returns – items that have been returned by a customer. It is important to track returns as it may prove as evidence of a problem with the stock.
• Sales discounts – It enables a business to track any discounts given.
• Sales allowance – A reduction in price due to a quality problem or other reason.

Contra Revenue Account Example

In our example, we are going to look at the sales return.

ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500. The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500. The sales figure is therefore 87,500.

Contra Liability Account

A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, notes payable, and other indebtedness.

Contra Liability Account Example

An example of a contra liability account would be bonds. A company might issue bonds as a way to borrow money. The company would then have a contra liability account for the bonds. This would allow the company to track the amount of money that has been borrowed. The contra liability account would be used to offset the liability account on the balance sheet.

Contra Equity Account

A contra equity account is an account that is used to offset another equity account on the balance sheet. Contra equity accounts are typically used for a company to buy back its stock or shares.

Contra Equity Account Example

An example of contra equity with buying back shares or stock would be a company that has issued shares to the public. The company might decide to buy back some of its shares. The contra equity account would be used to offset the equity account on the balance sheet. This would give a more accurate picture of the company’s equity.

Why are Contra Accounts Inportant?

Contra accounts play an important role in accounting by helping businesses track certain aspects of their finances more accurately. For example, contra revenue accounts can be used to track the full cost of sales less any discounts or returns. It can help businesses see the complete picture of their income and expenses.

All in all, contra accounts are an important tool for businesses to use to understand their financial standing better.

Debit or Credit

When looking at the balance sheet, it is essential to understand what is being shown on the two sides – the assets debit balance and the liabilities credit balance. The assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side. The difference between the two is called equity or net worth.

Conclusion for Contra in Accounting

Contra accounts play an important role in accounting by helping businesses track certain aspects of their finances more accurately. It can help companies see the complete picture of their income and expenses and their equity or net worth.