Contra Accounts

Contra accounts provide us with additional information about their parent account.  Typically they record something that reduces the carrying amount of parent account.  Below is an example of how they will be displayed in financial statements.

Probably the best example of a contra account is Accumulated Depreciation.  This is the accumulation of all depreciation expenses for an individual asset. Let's look at an example.

You purchase a table for $100 and you expect it to last 5 years.  So you are going to depreciate this item at $20 per year. After two years you will have accumulated depreciation of $40.

In the Balance Sheet this will be reported as

Another good example of a contra account is Allowance for Bad Debts.  You make sales on credit. This will create an asset of Accounts Receivable (until the debts are paid).  However you know from history that you will not be able to recover all of these debts.  You just don't know which ones you will not be able to recover. To allow for this you set aside a certain amount of money (In the Receivables topic we will look at how you calculate this) as an allowance for bad debts.  In the Balance Sheet this will be reported as

The account number of a contra account will typically follow directly after the parent account.  You will notice in the practice set that Equipment is 160 and Depreciation is 160.1.  Accounts Receivable is 104 and Allowance for Bad Debts is 104.1.  The account number is the best clue to identifying a contra account.

A contra account will have the opposite normal balance to the parent account such that Equipment is Dr and Accumulated Depreciation is Cr.