Contra Account
Candlefocus EditorA contra account is a type of account that can be used to offset the balance of a related account and reduce its value. For example, when recording a write-down of the value of an asset in the asset register, the current value is recorded in the main account, while the decreased value is recorded in the contra account. The total of the two accounts should equal the original value of the asset and therefore the net value of the asset is the current value.
Contra accounts are mainly used to record seizable events such as write-downs, revaluations, adjustments, and changes in asset values and depreciation. The most commonly used contra accounts in financial accounting include accumulated depreciation and allowance for doubtful accounts.
Accumulated depreciation is a contra asset account used when recording the depreciation of an asset. The original cost of an asset is recorded in the asset account, while an accounting entry for the amount of depreciation is recorded into the accumulated depreciation account. This is done over the period of time the asset is to be depreciated.
Allowance for doubtful accounts is a contra liability account used when recording bad debt expense. The original amount of an account receivable is recorded in the account receivable account, while an accounting entry for the amount of bad debt is recorded into the allowance for doubtful account. This is done as an estimation of how much an account receivable will not be paid.
Contra accounts are vital in ensuring accurate financial statements and providing a clear picture of a company’s assets, liabilities and equity. By having two separate accounts to record changes, the original value of the asset or liability is preserved, while the current value is recorded in the second account. This allows accountants to analyze and report the financials of a company with greater accuracy and transparency.