Bookkeeping requires one to know many terms and rules. Contra accounts are special accounts that are established by company bookkeepers to decrease the balance in another account indirectly. Although most of them are used very rarely in bookkeeping practice, they are an important part of bookkeeping records. They allow to preserve the identity of the primary account. In addition, the contra account can be used if there is no account to make an entry opposite to the normal balance of the primary account.
The normal balance of a contra account for an Asset is credit. Thus, you could describe a contra asset as a negative asset. It is an account that reduces or offsets an account it is assigned to. For example, Accumulated depreciation on equipment reduces its associated asset account – Equipment.
A contra liability account is paired with another liability account. This type of account is used less frequently than the contra asset accounts. However, they are still used by bookkeepers when they need to make a book value adjustment to an asset or a liability. When you see Discount on Bonds Payable account or Gain on Reduction account, you will know that these are contra liability accounts.
Contra Owner’s Equity
A contra account for Owner’s equity is used to decrease the standard equity account. When a business decides to buy back its shares, it will use a Treasury stock account to reflect this event. Since the payment of funds to the business owners decreases the owner’s equity account, the Owner’s drawing contra account is being used.
What is a Contra Revenue Account?
By now, if asked “What is a contra revenue account?”, you will be able to tell that it is an account created to reflect a reduction in revenue. Such a decrease can, for example, be a result of a reduction in product or service price. Respective contra accounts are created: Sales returns, Sales allowances, and Sales discount.
What is a Contra Expense Account?
Just like any contra account discussed above, this account is added to the bookkeeping books to reduce or offset an amount previously recorded in one of the expense accounts. Accordingly, this account will have a credit normal balance. Examples of such accounts include Purchase returns, allowances, and discounts.