Contra Account

AAA

DEFINITION of 'Contra Account'

An account found in an account ledger that is used to reduce that value of a related account. Items recorded in the contra account are specifically designed to offset other transactions, and are recorded as the opposite type of entry. If a debit is recorded in a related account, the contra account record will be a credit.

INVESTOPEDIA EXPLAINS 'Contra Account'

Contra accounts are used for several reasons. They can be used to correct previous accounting mistakes, to reduce the value of an asset that is depreciating or to allot for uncollectible bills. Examples of contra accounts include Allowance for Uncollectibles, a contra account to Accounts Receivable and Accumulated Depreciation, a contra account to Assets.

Accountants use contra accounts rather than reduce the value of the non-contra account directly in order to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time consuming.

When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. The allowance method of accounting allows a company to estimate what to place in the contra account, while the percent of sales method assumes that the company will not be able to collect payment for a fixed percentage of goods or services that it has sold. Both methods can help a company understand what write offs may do to its bottom line.

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Adjusting Journal Entry

    An entry in financial reporting that occurs at the end of a reporting ...
  3. Discovery Value Accounting

    A method of accounting often used in the oil and gas, mining ...
  4. Contra Market

    A move against the direction or trend of the broad market. Contra ...
  5. Accounting Principles

    The rules and guidelines that companies must follow when reporting ...
  6. Accounting

    The systematic and comprehensive recording of financial transactions ...
RELATED FAQS
  1. What would cause a decrease in accumulated depreciation?

    When a company's accumulated depreciation decreases, it is normally due to the sale of a long-term fixed asset or group of ... Read Full Answer >>
  2. What happens to accumulated depreciation when you sell an asset?

    When a company sells an asset, its total accumulated depreciation is reduced by the amount related to that asset. The accumulated ... Read Full Answer >>
  3. When should I use depreciation expense instead of accumulated depreciation?

    The most basic difference between depreciation expense and accumulated depreciation lies in the fact that one appears as ... Read Full Answer >>
  4. How is accounting in the United States different from international accounting?

    Despite major efforts by the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, ... Read Full Answer >>
  5. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
  6. How are transfer prices set?

    The United States, like most nations, does not want to allow transfer pricing methods that reduce the amount of taxes the ... Read Full Answer >>
Related Articles
  1. Markets

    Material Adverse Effect A Warning Sign For Stocks

    Learn what this phrase means and how to spot it in a company's financial statements.
  2. Bonds & Fixed Income

    Accounting Rules Could Roil The Markets

    FAS 142 is an accounting rule that changes the way companies treat goodwill. Be aware of the impact it has on reported earnings to avoid making bad investment decisions.
  3. Fundamental Analysis

    Detecting Accounting Manipulation

    "One-time charges" and "investment gains" are two strategies companies can use to distort their numbers.
  4. Fundamental Analysis

    Accounting For Intercorporate Investments

    Understanding these investments is key to determining the value and future prospects of any business.
  5. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  6. Markets

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
  7. Markets

    What Is A Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  8. Options & Futures

    Core Earnings Strip Away "Creative" Accounting

    This metric is an attempt to counteract creative accounting, but it poses its own set of challenges.
  9. Retirement

    A Look At IRA Separate Accounting Rules

    If you are a younger multiple beneficiary, make sure you understand the RMD regulations.
  10. Options & Futures

    Lady Godiva Accounting Principles

    Find out how and why these rules can help companies "come clean" in post-Enron Wall Street.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center