A contra account is an account used in a general ledger to offset the balance of another related account with which it is paired. The purpose of a contra account is to reduce the value of a related account when the two are netted together. Contra accounts appear in the financial statements directly below their paired accounts. There are three types of contra accounts: contra assets, contra liabilities, and contra equity.
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Contra Assets: These accounts offset the balance of an asset account. Examples of contra asset accounts include Allowance for Doubtful Accounts and Accumulated Depreciation.
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Contra Liabilities: These accounts offset the balance of a liability account. An example of a contra liability account is the bond discount account, which offsets the bond payable account.
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Contra Equity: These accounts reduce the equity account and carry a debit balance. An example of a contra equity account is Treasury stock, which represents the amount paid to buy back stock.
Contra accounts are used to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or net realizable amount.
