A contra account cancels out the balance of the associated account it is paired with. The financial statements show contra accounts next to their associated accounts. For presentational reasons, the balances in the two accounts may occasionally be combined to show just the net amount.
A contra asset account is used to offset the associated account with a credit amount if it is an asset account. A contra liability account is used to offset the associated account with a debit balance if it is a liability account. As a result, a contra account's natural balance is always the polar opposite of the account with which it is associated.
The accumulated depreciation account, which balances the fixed asset account, is the most typical contra account. A number of fixed assets are represented by their initial acquisition costs in the fixed asset account, and their cumulative depreciation is represented by their contra account (accumulated depreciation). The net quantity of fixed assets still in existence is revealed when the asset account and contra asset account are combined. Since a counter asset account does not represent long-term capital gains, it is not categorized as an asset.
Contra asset accounts are more frequent than contra liability accounts. The bond discount account, which balances the bond payable account, is an illustration of a contra liability account. The bond carrying value is determined by adding the two accounts. Since a contra liability account does not indicate a future obligation, it is not categorized as a liability.
The treasury stock account, which is a deduction from equity since it represents the sum paid by a firm to purchase back its stock, is an example of a counter account within equity.
Net revenue is the outcome of deducting contra revenue from gross revenue. Transactions involving contra revenue are documented in one or more contra revenue accounts, typically with a debit balance (as opposed to the credit balance in the typical revenue account). There are three types of contra revenue accounts that are frequently used:
- Sales returns. It either includes a provision for returns or the actual revenue deduction related to returns.
- Sales allowances. Contains either the actual amount of the allowance linked to specific sales or an allowance for price reductions on products with minor flaws.
- Sales discounts. Contains the amount of the sales discount granted to the customer, which is typically a discount given in exchange for the consumer making an early payment. Since it does not represent a future obligation, it does not have value and is not categorized as a liability.