What is a Contra Account?
Contra accounts are essentially any account found within the accounting records of a corporation or other official entity that carries a balance that is intended to offset the balance of related account. Essentially, a contra account is considered to be the flip side of the story with the opposite account, and is often used as a means of demonstrating the relationship between various debits and credits within the overall financial structure of the corporation. When it comes to an example of how one account offsets another account, perhaps the easiest illustration would be to take an account that records accumulated amortization into account. In order to balance the debit position associated with the amortization, an opposite or contra account with the balance sheet structure will represent a credit that essentially offsets the amortized figure. This helps to maintain a balance between debits and credits in the bookkeeping process. However, it must be understood that the concept of the
A contra account has the opposite balance of all other accounts within that classification of accounts. For example: Retained Earnings has a normal credit balance and Dividends has a normal debit balance; Equipment has a debit balance and Accumulated Depreciation – Equipment has a credit balance. In these examples, Dividends is contra to Retained Earnings, and Accumulated Depreciation – Equipment is contra to Equipment. A contra account has a balance that is opposite the balance of the account to which it relates.
