What is a contra account?
A contra account is a general ledger account which is intended to have its balance be the opposite of the normal balance for that account classification. For instance, a contra asset account is intended to have a credit balance instead of the debit balance normally found in an asset account. A contra revenue account is intended to have a debit balance instead of the credit balance normally found in a revenue account. The use of a contra account allows a company to continue to report the original amount (or the gross amount) and to also report the carrying amount (or net amount).
To illustrate, let's use the contra asset account Allowance for Doubtful Accounts, which is associated with the asset account Accounts Receivable. If the balance in the Allowance account is a credit of $2,000 and the Accounts Receivable account has a normal debit balance of $40,000, the net realizable value of the receivables is $38,000. The use of this contra account allows 1) the original amount of uncollected sales invoices to continue to be reported in Accounts Receivable, and 2) the net amount of $38,000 to be reported on the balance sheet as the amount that will be turning to cash.
Accumulated Depreciation of Equipment is a contra asset account that is associated with the plant asset Equipment. If the balance in the account Accumulated Depreciation is a credit of $50,000 and the Equipment account has a normal debit balance of $92,000, the carrying amount (or book value) of the equipment is $42,000.
Sales Returns and Allowances is a contra revenue account that is associated with the revenue account Sales. If the balance in this contra account is a debit of $3,000 and the Sales account has a normal credit balance of $400,000, the net sales are $397,000. The contra account enables the company's management to see that its customers found $3,000 of the $400,000 of sales to be unacceptable.