You’ve probably heard of a general ledger account, but have you heard of a contra account? Well, a contra account is essentially a type of general ledger account. However, it has a few unique characteristics worth noting. To learn more about contra accounts and how they are used, keep reading.
Contra Accounts: The Basics
As explained by Investopedia, a contra account is a type of general ledger account that’s used specifically for the purpose of reducing an associated account’s balance. In a typical asset account, the balance is negative. In a contra account, however, the balance is positive — and this is the characteristic feature of contra accounts. They have a credit balance instead of a debit balance, allowing them to reduce the paired account’s total balance.
How Contra Accounts are Used
Contra accounts are used in a variety of applications, one of which is for uncollectible accounts. In the same Investopedia article cited above, it explains that contra accounts can be added to an accounts receivable. The balance is used to represent the total amount that’s expected to go uncollected; thus, reducing the amount of revenue reported in accounts receivables. In a perfect world, business owners would always receive payment for the products and services they sell. However, there are times when a customer may not pay, which is where contra accounts come into play. Using a contra account, you can record nonpayments so they don’t adversely affect your accounts receivables.
Another example of a contra account is an accumulated depreciation account. This type of account is used to offset the fixed assets account. While the fixed asset account has the cost of acquisition, the contra account reflects the total cost of all depreciation expenses that have incurred against the respective assets over time. Business owners and accounts typically look at both the contra account and accumulated depreciation account to determine the net dollar value of the assets.
There’s also a contra liability account, which is somewhat confusing given that it’s not an actual liability account. Rather, a contra liability account is used to offset a payable account. A bond discount account, for instance, is a type of contra liability account. When a bond discount account is added to a contra liability account, it reveals the carrying value of the respective bond. Hopefully, this gives you a better understanding of contra liability accounts.
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