What is a contra account? Types, examples of contra accounts

In financial accounting, balance is critical.

Whenever a debit entry is made (adding a recently purchased asset, for example), a corresponding credit entry needs to be created (to cash, for instance).

This is the main principle of double-entry accounting, but there are a number of circumstances in which things get a little more complicated, requiring the use of what’s known as a contra account.

In this article, we’ll explain what contra accounts are, what common types exist, and how they work in practice.

What is a contra account? 

A contra account is an account recorded on the opposite side of a related account to offset its balance.

Instead of reducing the value of the account in question, you use a separate contra account to reduce the balance of the paired account, giving a more detailed and accurate picture of a company’s financial position.

For instance, say a company has accounts receivable of $50,000. Based on experience, management estimates that $5,000 will not be collected.

Instead of reducing AR directly, a contra account called Allowance for Doubtful Accounts is used.

The purpose of contra accounts is to provide more clarity and transparency in financial reporting. They allow businesses to show both the original value of an account as well as any reductions that impact it, rather than combining the two into a single figure, which might distort the picture.

By using contra accounts, finance teams make it easier for stakeholders to understand the true value of assets, liabilities, equity, or revenue.

Contra accounts share some common characteristics. They:

• Are always linked to a specific account
• Hold an opposite natural balance (for example, a contra asset has a credit balance instead of a debit)
• Appear alongside the related account on financial statements
• Help highlight changes in value over time

Common types of contra accounts 

Businesses use several types of contra accounts, each tied to a specific category on the ledger.

Most fall into one of these four categories:

1. Contra asset accounts. These accounts reduce the value of an asset. Examples include accumulated depreciation, which offsets property and equipment, and allowance for doubtful accounts, which reduces accounts receivable.
2. Contra liability accounts. These accounts reduce the value of a liability. A common example is discount on bonds payable, which lowers the carrying value of bonds.
3. Contra equity accounts. These accounts reduce the value of shareholders’ equity. Treasury stock is the most widely used example, reflecting a company’s repurchase of its own shares.
4. Contra revenue accounts. These accounts reduce the value of reported revenue. Examples include sales returns, allowances, and discounts given to customers.

Types of contra asset accounts 

There are many different use cases for using contra accounts to reduce the value of assets on the balance sheet. These are some of the most common types:

• Accumulated depreciation. This contra account records the total depreciation expense applied to fixed assets like machinery or buildings. It offsets the original purchase cost, showing the net book value of the asset.
• Allowance for doubtful accounts (ADA). This contra account estimates the portion of accounts receivable that is unlikely to be collected. This reduces receivables to reflect the cash that the business realistically expects to receive.
• Accumulated depletion. This contra account tracks the reduction in the value of natural resources (like minerals, timber, or oil) as they are extracted or used, ensuring the asset value reflects ongoing consumption.
• Reserve for obsolete inventory. This contra account represents the write-down of inventory that can no longer be used or sold, reducing its balances to its net realizable value.
• Discount on notes receivable. This contra account reflects the difference between the face value of a note receivable and its lower present value, adjusting receivables to account for the time value of money.

Contra account examples 

Contra accounts appear across all major areas of the financial statements. Some of the most common examples of contra accounts include:

• Accumulated depreciation: Reduces the value of fixed assets by recording wear and tear over time.
• Allowance for doubtful accounts: Offsets accounts receivable by estimating the portion that may not be collected.
• Accumulated depletion: Lowers the value of natural resource assets as they are consumed.
• Reserve for obsolete inventory: Adjusts inventory balances for items that can no longer be sold.
• Discount on notes receivable: Reduces notes receivable to present value.
• Discount on bonds payable: Decreases the carrying value of bonds to reflect issuance at less than face value.
• Treasury stock: Reduces shareholders’ equity when a company repurchases its own shares.
• Sales returns and allowances: Decreases gross revenue for customer returns, allowances, and discounts.

How are contra accounts recorded? 

Contra accounts are entered in the general ledger, just like regular accounts. The only difference is that they carry the opposite balance to the main account they are offsetting.

For example, while the typical asset account carries a debit balance, the corresponding contra asset account is recorded with a credit balance, allowing it to reduce the value of the related asset.

This opposite treatment applies across other categories as well, with contra liabilities, contra revenues, and contra equity accounts all carrying debit balances.

Entries are then updated whenever an adjustment occurs. For example, a company might record depreciation each accounting period by increasing accumulated depreciation, or reduce revenue by recording a customer return.

By maintaining these offsets separately, rather than folding them into the main account, businesses preserve transparency and make sure that financial statements reflect both original values and the changes that affect them.

How contra accounts work in financial reporting 

Contra accounts have an important impact on all financial statements, especially on the balance sheet.

Role of contra accounts in balance sheets

On the balance sheet, contra accounts appear directly beside their related accounts to show both the original amount and the adjustment. For instance, accumulated depreciation offsets property, plant, and equipment, which reduces the gross cost to a net book value.

By laying financials out like this, stakeholders gain a clearer picture of asset values and how they change over time.

Impact of contra accounts on the income statement

On the income statement, you’ll see that sales returns and allowances reduce gross revenue to arrive at a net sales figure.

Similarly, sales discounts record reductions in the selling price granted to customers for early payment or other reasons.

How contra accounts affect net asset values

Without contra accounts, asset balances could appear overstated, giving a misleading impression of a company’s resources.

That’s the main role of contra accounts: to ensure that current financials are stated correctly.

For example, allowances for doubtful accounts reduce receivables to the amount a business actually expects to collect, while reserves for obsolete inventory ensure stock is reported at its net realizable value.

These adjustments provide a realistic measure of net assets and help stakeholders evaluate financial health more accurately.

Streamline financial management with BILL 

Contra accounts play a vital role in accurate financial reporting by offsetting related accounts to reveal true asset, liability, equity, and revenue values. They maintain transparency by showing both gross balances and adjustments, helping stakeholders better assess financial health.

While managing entries for contra accounts manually can be complex, BILL streamlines the process by automating AP/AR activity and syncing directly with accounting systems.

Discover BILL’s integrated financial operations platform today.