Contra Account

Loading the player...

What is a 'Contra Account'

A contra account is an account found in an account ledger that is used to reduce the 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.

BREAKING DOWN '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. Contra Liability Account

    A liability account that is debited in order to offset a credit ...
  2. Accounts Uncollectible

    Loans, receivables or other debts that have virtually no chance ...
  3. Contra Proferentem Rule

    A rule in contract law which states that any clause considered ...
  4. Account Activity

    A banking term that refers to any activity that creates a debit ...
  5. Savings Account

    A deposit account held at a bank or other financial institution ...
  6. Trading Account

    1. An account similar to a traditional bank account, holding ...
Related Articles
  1. Economics

    What is a Contra Account?

    A contra account is an offset that reduces the value of a related account.
  2. Economics

    What's an Allowance for Doubtful Accounts?

    The allowance for doubtful accounts represents the percentage of the accounts receivable the company expects to write-off as uncollectible.
  3. Credit & Loans

    What is an Account Balance?

    An account balance represents the total amount of money in a financial account at any given moment.
  4. Savings

    Explaining Checking Accounts

    A checking account is an account at a financial institution, usually a bank, that allows for deposits and withdrawals.
  5. Economics

    What Does Debit Mean?

    Debit is an accounting term used to refer to the left side of an accounting journal entry. Each debit must be offset by an equal credit entry.
  6. Professionals

    Accounting Research Manager: Job Description & Average Salary

    Learn about the average salary of an accounting research manager as well as the necessary skills, experience and education, and licenses to hold this position.
  7. Economics

    What is a Capital Account?

    Capital account is an economic term that refers to the net change in investment and asset ownership for a nation.
  8. Forex Education

    Accounting Basics: The Accounting Process

    By Bob Schneider As implied earlier, today's electronic accounting systems tend to obscure the traditional forms of the accounting cycle. Nevertheless, the same basic process that bookkeepers ...
  9. Options & Futures

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  10. Professionals

    Career Advice: Accountant Vs. Controller

    Learn about the differences between controllers and accountants, how the two are related and which is the best career choice for aspiring bookkeepers.
RELATED FAQS
  1. Which contra accounts are the best for indicating profitability in a company?

    Learn about the three contra accounts that affect profitability: the contra asset account, the contra liability account and ... Read Answer >>
  2. How does a contra-asset account differ from a contra-liability account?

    Understand how a company's contra-asset account differ from its contra-liability account. Learn how contra accounts are used ... Read Answer >>
  3. What does it mean when the shares in my account have been liquidated?

    An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. ... Read Answer >>
  4. What's the difference between the current account and the capital account?

    Learn the difference between the current account and capital account in the balance of payments. Compare and contrast their ... Read Answer >>
  5. How can I use Excel as my business's general ledger?

    Follow these steps to set up a general ledger accounting system in Excel. A small business can use Excel as a substitute ... Read Answer >>
  6. What's the difference between the current account and the balance of payments?

    Learn about the differences between balance of payment and current account; discover different uses of each term and how ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center