What is a Contra Account?

Definition: Contra Accounts are set up for the purpose of offsetting the balance of a related account.

A contra account is considered to be used as a way of showing the relationship between certain debits and credits with the overall financial structure of an entity.

How it is used in Practise:

There are a number of situations where one account is used to offset another. One popular example is accumulated amortization, which is a contra-asset account; meaning that it acts in the opposite way of a regular asset account.

Assets are debited when increased, and contra-assets are credited when increased.

In this way, the accumulated amortization account would offset the related asset account, which is recorded as a debit. It is important to note that there are also contra-liability accounts, where an account with a debit balance offsets a liability account.

Transparency

By using the concept of a contra account, it is possible to simply look at the accounting records of a given corporation and trace backwards the history related to certain debits and credits in the books, and how they are related to one another.