What is a contra account?

In accounting records, offsetting accounts are often used to adjust for potential losses such as depreciation or impairment.

The elements that make up a contra account

The current method of matching accounts is typically composed of two main elements: the system of accounting accounts and the matching relationships within accounting.

Characteristics of a contra account

The offsetting account has several notable characteristics, such as:

- In contrast to the main account: A contra account has a corresponding nature to its main account.

- Adjust the value: Contra accounts are typically used to adjust or offset the value of a main account through the recording of the contra account. The value of the main account may be adjusted or reduced.

- GCopy this to the same main account: TCounterpart accounts are typically recorded alongside the main account in the same accounting entry.

- pUsed in financial reportingContra accounts are commonly used in the preparation of financial statements. Figures from contra accounts can be used to adjust and accurately reflect the value of main accounts in the financial statements.

- Opposite: Contra accounts are commonly used to create a pair of opposing entries in accounting records. When a debit is recorded in a main account, the contra account is used to record an equivalent credit, and vice versa.

Types of offsetting accounts

A contra account can be used to offset a variety of different types of accounts.

Counterpart asset account

An asset is recorded as a credit balance used to reduce the balance of another asset. The balance of the offsetting asset account is a credit balance. This account reduces the value of a tangible asset. This account is not classified as an asset because it does not represent lasting value.

Counterpart liabilities

The balance of a liability account is a debit balance. This account reduces the value of the liability. A contra account for liabilities is not used as frequently as a contra account for assets. This account is not considered a liability because it does not represent a future obligation.

Counterpart equity account

Equity is recorded as a debit balance – used to reduce the balance of the standard equity account. This is a reduction in equity because it represents the amount the company pays to repurchase shares.

The equity account reduces the total number of outstanding shares. The treasury stock account is debited when the company repurchases its own shares from the open market.

Counterpart revenue account

A reduction from total revenue, which generates net revenue, is a contra revenue account. These transactions are reported in one or more contra revenue accounts. This account typically has a debit balance and reduces the company's total net revenue.