Contra Account

A contra account is an account in the General Ledger that offsets the balance of a related account. It is used to reduce the value of the associated account without directly altering its original balance. Contra accounts are commonly used in accounting to provide clearer financial reporting and to maintain the integrity of financial statements.

Examples of contra accounts include:

• Accumulated Depreciation: This account offsets the value of fixed Assets, representing the total Depreciation expense that has been allocated over time.
• Allowance for Doubtful Accounts: This account reduces accounts receivable to reflect the estimated uncollectible amounts.

Cases:

• In a company with machinery worth $100,000, if $20,000 is accumulated Depreciation, the net Book Value of the machinery would be $80,000.
• A company has $50,000 in accounts receivable and estimates that $5,000 will not be collected. The allowance for doubtful accounts would reduce accounts receivable to $45,000 on the balance sheet.