Contra Accounts - 8 Workhorses Of Bookkeeping And Accounting

While the general public and business people are familiar with the general accounts that appear in the financial statements, many owners, executives, and other non-accounting personnel often ignore the lesser known accounts that are called Contra Accounts. Contra Accounts are accounts that are matched or paired to a related account and subtracted from it. These bookkeeping accounts are included in the companys chart of accounts. Often they might just be called ledger accounts or GL accounts. If we see in a balance sheet: Equipment ........................................$120,000 Less: Accumulated depreciation........... 20,000..... 100,000 Accumulated depreciation is the contra account, and Equipment, the related account. Balance sheet contra accounts: Accumulated depreciation........................... contra-asset Accumulated depletion................................ contra-asset Drawing..................................................... contra-capital Allowance for doubtful accounts................... contra-asset Discount on bonds payable.........................contra-liability Income statement contra accounts: Sales returns and allowances...................... contra-revenue Sales discounts.......................................... contra-revenue Purchase returns and allowances................. contra-cost Purchase discounts..................................... contra-cost All accounts have what is known as a Normal Balance. The normal balance of an account corresponds to the side in which the account is increased. To fully understand this concept, lets have a refresher of the rules of accounting: Rule of Accounting 1, for assets: Increases in assets are recorded by debits to the asset accounts. Decreases in assets are recorded by credits to the assets accounts. Rule of Accounting 2, for liabilities: Increases in liabilities are recorded by credits to the liability accounts. Decreases in liabilities are recorded by debits to the liability accounts. Rule of Accounting 3, for owners equity: Increases in owners equity are recorded by credits to the owners equity accounts. Decreases in owners equity are recorded by debits to the owners equity accounts. According to the above rules, assets are increased by debits; liabilities and owners equity by credits. It follows then that the normal balance of all assets is debit, and for liabilities and owners equity accounts the normal balance is credit. To illustrate: Cash is an asset account; therefore, its normal balance is debit. Now, if for some reason the cash account shows a credit balance, then credit would be abnormal. The explanation could be that we have overdrawn the account. Or perhaps it is a mistake such as a misposting. Now, in the case of the contra accounts, they will have a normal balance that is the opposite of their related account. If we focus on the above example where we show Equipment $120,000. We can now say that the normal balance of Accumulated depreciation is credit (the opposite of the related account Equipment). We are now prepared to give a full definition: A contra account is an account that is matched or paired to a related account and subtracted from it. Therefore, its normal balance is the opposite of the related account.