Contra Account

What is a Contra Account? Definition

A contra account is an account with a balance opposite the normal accounts
in its category. Contra accounts are usually linked to specific accounts on
the balance sheet and are reported as subtractions from these accounts. In
other words, contra accounts are used to reduce normal accounts on the
balance sheet.
Types of Contra Accounts – Explanation
There are a few different types of contra accounts in the chart of accounts.
Each one is tied to their respective asset, liability, or equity account to reduce
their carrying balance on the balance sheet. Here’s a list of the main types of
contra accounts:

Contra Asset Account – A contra asset account is an asset that carries a

credit balance and is used to decrease the balance of another asset on the
balance. An example of this is accumulated depreciation. This account
decreases the fixed asset carrying balance.
Contra Liability Account – A contra liability account is a liability that carries a
debit balance and decreases other liabilities on the balance sheet. An
example of this is a discount on bonds payable.
Contra Equity Account – A contra equity account has a debit balance and
decreases a standard equity account. Owner’s Drawing a/c,treasure stock is a
good example as it carries a debit balance and decreases the overall
stockholders’ equity.
Example
How are Contra Accounts Used and Reported?
Take the equipment account for example. Equipment is a long-term asset
account that has a debit balance. Equipment is depreciated over its useful.
This depreciation is saved in a contra asset account called accumulated
depreciation. The accumulated depreciation account has a credit balance and
is used to reduce the carrying value of the equipment. The balance sheet
would report equipment at its historical cost and then subtract the
accumulated depreciation.
By reporting contra accounts on the balance sheet, users can learn even
more information about the company than if the equipment was just reported
at its net amount. Balance sheet readers cannot only see the actual cost of
the item; they can also see how much of the asset was written off as well as
estimate the remaining useful life and value of the asset.
The same is true for other asset accounts like accounts receivable. Accounts
receivable is rarely reported on the balance sheet at its net amount. Instead, it
is reported at its full amount with an allowance for bad debts listed below it.
This shows investors how much receivables are still good. Maybe more
importantly, it shows investors and creditors what percentage of receivables
the company is writing off.

What is a Contra Asset Account?

Define Contra Asset Account
Contra means against. In bookkeeping terms, a contra asset account refers to an
account which is offset against an asset account.
As an asset account is normally a debit balance, a contra asset account will normally
be a credit balance. When the two balances are offset against each other they show the
net balance of both accounts.
Contra asset accounts are useful when in bookkeeping terms a business needs to keep
the two accounts separate so as not to lose information, but for presentation reasons in
the financial statements, it is necessary to offset them against each other and show a
net balance.

Reasons to Show Contra Asset Accounts on the Balance Sheet

By reporting contra asset accounts on the balance sheet, users of financial

statements can learn more about the company. For example, if a company just
reported equipment at its net amount, users would not be able to observe the
purchase price, the amount of depreciation attributed to that equipment, and
the remaining useful life. Contra asset accounts allow users to see how much
of an asset was written off, its remaining useful life, and the value of the asset.

Contra Asset Account Examples

Accumulated Depreciation is a Contra Asset Account
The accumulated depreciation contra asset account records the depreciation to date of
a fixed asset. The account is normally a credit balance and in use is offset against the
fixed asset account which is normally a debit. The net balance of the two accounts
shows the net book value of the fixed asset. Using the two accounts, allows
information about the original cost of the fixed asset to be maintained on the fixed
asset account, and details of the depreciation of the asset to be maintained on the
accumulated depreciation contra asset account
In the trial balance the accounts would appear as follows.

Account Debit Credit Notes

Fixed assets 4,000 Asset account
Accumulated depreciation 3,000 Contra asset account
…..
Trial balance extract showing contra asset account

In the financial statements the asset account would be offset against the contra asset
account to show the net balance.

Fixed assets 4,000 Asset account

Accumulated depreciation 3,000 Contra asset account
Net book value 1,000 Net balance after offset
Balance sheet extract showing contra asset account

Example of Accumulated Depreciation

For example, Company A purchases a machine for $300,000. The company
estimates that the machine’s useful life is three years with no salvage value and
will apply a straight-line depreciation method to the machine. The journal entries
will look as follows:
 On the balance sheet, accumulated depreciation would increase by every year
to reduce the value of the machine. Therefore:

 At the end of year 1, the net value of the machine would be $300,000 –
$100,000 in accumulated depreciation = $200,000.
 At the end of year 2, the net value of the machine would be $300,000 –
$200,000 in accumulated depreciation = $100,000.
 At the end of year 3, the net value of the machine would be $300,000 –
$300,000 in accumulated depreciation = $0.

Contra Liability Account

What is a Contra Liability Account
In finance, a contra liability account is a liability account that's debited for the
explicit purpose of offsetting a credit to another liability account. In other words,
the contra liability account is used to adjust the book value of an asset or liability.

BREAKING DOWN Contra Liability Account

Companies that issue bonds are likely to use contra liability accounts. If the bond
is sold at discount, the company will record the cash received from the bond sale
as "cash", and will offset the discount in the contra liability account. For example,
a $1,000 bond sold at $900 would result in the following journal entries:

 A $900 debit to the cash

 A $1,000 credit to the Bonds Payable
 A $100 debit to Discount on Bonds Payable.

Naming the journal entry for a contra liability account typically involves the use of
the word “discount." For example, a contra liability account for the Notes Payable
would be called the Discount on Notes Payable. The value of the notes is
calculated as the credit balance in Notes Payable less the debit balance in
Discount on Notes Payable.

In the afore mentioned example, the debit to the contra liability account of $100
lets the company recognize that the bond was sold at a discount.

Contra Equity Account

A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet.
Treasury stocks represent a contra equity account. When a company buys back its own shares from the open
market, it records the transaction by debiting the treasury stock account. A company may decide to buy back
its shares when management feels the stock is undervalued or because it desires to pay stock dividends to its
shareholders.

The Drawing Account is a Capital Account

To answer your question, the drawing account is a capital account. It's debit balance will reduce the
owner's capital account balance and the owner's equity. The drawing account's purpose is to report
separately the owner's draws during each accounting year. Since the capital account and owner's
equity accounts are expected to have credit balances, the drawing account (having a debit balance)
is considered to be a contra account. In addition, the drawing account is a temporary account since
its balance is closed to the capital account at the end of each accounting year.
Contra Revenue Account

The contra revenue accounts commonly used in small-business accounting include sales returns, sales
allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of
a company’s revenue. The amount of gross revenue minus the amount recorded in the contra revenue accounts
equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a
product to the company for a refund. Sales allowance represents discounts given to customers to entice them to
keep products instead of returning them, such as with slightly defective items. The sales discount account
represents the discount amount a company gives to customers as an incentive to purchase its products or
services.