A contra account is a ledger account which appears as a deduction from another account on a balance sheet of a company. Typically, the normal balance of a contra account is exactly opposite of the normal balance of its parent account.
In an accounting system, ledger accounts are designed to contain similar classes of transactions and/or balances. Hence, we typically post different similar but not identical transactions to separate ledger account. It is because clubbing together dissimilar transactions would jumble up the accounting record and impede any analysis. But for the purpose of presentation, we are often concerned only with the net figure of two similar classes/balances which we determine by subtracting one account from the another.
For example, we need separate accounts to hold the actual cost of property, plant and equipment and related accumulated depreciation. If we record depreciation related adjustments in the cost accounts, we will lose key information about the original cost of the assets and accumulated depreciation. To avoid this loss of important data, we record actual cost and depreciation in separate ledger accounts. However, since it would be meaningless to show the property plant and equipment cost account and the related accumulated depreciation account separately on the balance sheet, we subtract the accumulated depreciation account (the contra account) from the property, plant and equipment (the parent account) to arrive at the fixed assets net book value.
List of common contra accounts
As evident from the table below, each contra account has a parent account whose normal balance is exactly opposite of the normal balance of the relevant contra account.
|Contra Account||Parent Account||Normal Balance of Parent Account||Normal Balance of Contra Account|
|Provision for bad debts||Accounts receivable||Debit||Credit|
|Accumulated depreciation||Fixed assets||Debit||Credit|
|Treasury stock||Common stock||Credit||Debit|
|Discount on bond payable||Bonds payable||Credit||Debit|
by Obaidullah Jan, ACA, CFA and last modified on