Contra Account: A Complete Guide [+ Examples]

Everything you need to know about contra accounts

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Contents
Contents

What Is a Contra Account?

Contra accounts can be associated with any of the five main financial statement elements – assets, liabilities, revenue, expenses and equity.

In the financial statements, a contra account is presented as either:

For example:

Example #1: Revenue Contra Account

The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement.

In other words, contra revenue is a deduction from gross revenue, which results in net revenue.

Income Statement for year ended 31 December 2XXX
Income Statement Line Item Amount Account Type Dr/Cr
Sales Revenue - Gross $100,000 Parent Revenue Credit
(Less: Sales Discounts) ($15,000) (Contra Revenue) Debit
(Less: Sales Returns) ($10,000) (Contra Revenue) Debit
(Less: Sales Allowances) ($5,000) (Contra Revenue) Debit
Sales Revenue - Net $70,000 Net Balance (= Parent - Contra) Credit

Example #2: Asset Contra Account

The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.

  • Long-Term Assets are parent accounts that contain the original acquisition cost of fixed assets.
  • Accumulated Depreciation contra account contains the cumulative sum total of all the depreciation expenses that have been charged against those fixed assets over time.
  • The contra account offsets the parent account to reveal the remaining net amount of non-current assets.
Balance Sheet as at 31 December 2XXX
Balance Sheet Line Item Amount Account Type Dr/Cr
Property, Plant and Equipment - Gross $500,000 Parent Asset Debit
(Less: Accumulated Depreciation) ($155,000) (Contra Asset) Credit
Property, Plant and Equipment - Net $345,000 Net Balance (= Parent - Contra) Debit

Why Use a Contra Account?

A contra account tracks the reductions in value of an element of financial statements (asset, liability, revenue, expense, equity) separately from the element itself so that the financials report:

  1. Original value of an element
  2. Amount by which an element has been reduced
  3. Net value of an element (e.g., book value, current value, carrying value, or net realizable value)

For example:

  • Accumulated Depreciation contra asset account allows a business to easily calculate and track how its long-term fixed assets are expensed over their useful lives separately from the purchase cost, which more clearly shows the remaining value and useful life of those assets.
Contra Account vs. Parent Account
Formula Explanation
Parent Account Original historical value
(Contra Account) Reduction of the original value in the parent account
= Net Balance Net value based on the deduction (contra) made from the original historical amount (parent)

Is a Contra Account a Debit or Credit?

Contra Accounts - Normal Balance: Debit or Credit?
Account Type Parent Account Contra Account
Asset Debit Credit
Liability Credit Debit
Revenue Credit Debit
Expense Debit Credit
Equity Credit Debit

How Are Contra Accounts Reported in Financial Statements?

For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.

Formula:

Gross Parent Account Balance Contra Account Balance = Net Account Balance

Contra Accounts in Financial Statements: Example
Formula Balance Sheet >> Assets >> Vehicles
Gross Parent Account Balance Vehicles (at cost) $100,000
(Less: Contra Account Balance) Accumulated Depreciation (vehicles) ($10,000)
= Net Account Balance Vehicles (book value) = $90,000

The difference between the gross balance of a main account and its contra accounts reported as the net balance in a company’s financial statements is also referred to as a book value, current value, carrying value, or net realizable value.

5 Types of Contra Accounts [+11 Examples]

There are 5 types of contra accounts, mirroring the five key components of financial statements:

  1. Contra Assets
  2. Contra Liabilities
  3. Contra Revenue
  4. Contra Expenses
  5. Contra Equity

>>> Keep reading for examples of each category of contra account >>>

1. Asset Contra Account

A contra asset is an account with a credit balance that reduces the normal debit balance of a standard asset account to present the net value on a balance sheet, such as Accumulated Depreciation; Doubtful Accounts and Bad Debts; Discount on Notes Receivable; Obsolete, Unsold and Unusable Inventory.

Asset Accounts: Normal Balance
Asset Debit
Contra-Asset Credit

4 Examples of contra asset accounts most commonly presented on a company’s balance sheet:

1.1. Accumulated Depreciation [Asset Contra]

Accumulated Depreciation is a contra asset account with a credit balance that reduces the normal debit balance of Property, Plant and Equipment fixed assets in order to present the net value of long-term capital assets on a company’s balance sheet.

Balance Sheet >> Assets >> Non-Current Assets
Line Item Amount Account Type Dr/Cr
Property, Plant and Equipment - Gross $100,000 Parent Asset Debit
(Less: Accumulated Depreciation) ($10,000) (Contra Asset) Credit
Property, Plant and Equipment - Net $90,000 Net (= Parent - Contra) Debit

>>> Learn more about Accumulated Depreciation

1.2. Doubtful Accounts and Bad Debts [Asset Contra]

Allowance for Doubtful Accounts, also known as a Provision for Bad Debts, is a contra asset account with a credit balance that reduces the normal debit balance of the Accounts Receivable asset account in order to present the net value of receivables on a company’s balance sheet.

Balance Sheet >> Assets >> Accounts Receivable
Line Item Amount Account Type Dr/Cr
Accounts Receivable - Gross $100,000 Parent Asset Debit
(Less: Doubtful Accounts and Bad Debts) ($10,000) (Contra Asset) Credit
Accounts Receivable - Net $90,000 Net (= Parent - Contra) Debit

>>> Learn more about Allowance for Doubtful Accounts & Provision for Bad Debts

1.3. Discount on Notes Receivable [Asset Contra]

Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet.

Balance Sheet >> Assets >> Notes Receivable
Line Item Amount Account Type Dr/Cr
Notes Receivable - Gross $100,000 Parent Asset Debit
(Less: Discount on Notes Receivable) ($10,000) (Contra Asset) Credit
Notes Receivable - Net $90,000 Net (= Parent - Contra) Debit

1.4. Obsolete, Unsold and Unusable Inventory [Asset Contra]

Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet.

Balance Sheet >> Assets >> Inventory
Line Item Amount Account Type Dr/Cr
Inventory - Gross $100,000 Parent Asset Debit
(Less: Obsolete Inventory) ($15,000) (Contra Asset) Credit
(Less: Unsold Inventory) ($10,000) (Contra Asset) Credit
(Less: Unusable Inventory) ($5,000) (Contra Asset) Credit
Inventory - Net $70,000 Net (= Parent - Contra) Debit

2. Liability Contra Account

A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt.

Liability Accounts: Normal Balance
Liability Credit
Contra-Liability Debit

2 Examples of contra liability accounts most commonly presented on a company’s balance sheet:

2.1. Discount on Bonds Payable [Liability Contra]

Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet.

Balance Sheet >> Liabilities >> Bonds Payable
Line Item Amount Account Type Dr/Cr
Bonds Payable - Gross $100,000 Parent Liability Credit
(Less: Discount on Bonds Payable) ($10,000) (Contra Liability) Debit
Bonds Payable - Net $90,000 Net (= Parent - Contra) Credit

>>> Learn more about Discount on Bonds Payable

2.2. Short-Term Portion of Long-Term Debt [Liability Contra]

Short-Term Portion of Long-Term Debt, or Current Portion of Long-Term Debt (CPLTD), is a contra liability account with a debit balance that reduces the normal credit balance of the main Non-Current Debt liability account in order to present the net value of borrowings on a company’s balance sheet.

Balance Sheet >> Liabilities >> Non-Current Borrowings
Line Item Amount Account Type Dr/Cr
Long-Term Debt - Gross $100,000 Parent Liability Credit
(Less: Short-Term Portion of Long-Term Debt) ($10,000) (Contra Liability) Debit
Long-Term Debt - Net $90,000 Net (= Parent - Contra) Credit

3. Revenue Contra Account

Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.

Revenue Accounts: Normal Balance
Revenue Credit
Contra-Revenue Debit

3.1. Sales Discounts, Returns and Allowances [Revenue Contra]

Sales Discounts, Returns and Allowances are contra revenue accounts with a debit balance that reduce the normal credit balance of the main Sales Revenue account in order to present the net value of sales generated by a business in the revenue section of the company’s income statement.

Income Statement >> Revenue
Line Item Amount Account Type Dr/Cr
Sales Revenue - Gross $100,000 Parent Revenue Credit
(Less: Sales Discounts) ($15,000) (Contra Revenue) Debit
(Less: Sales Returns) ($10,000) (Contra Revenue) Debit
(Less: Sales Allowances) ($5,000) (Contra Revenue) Debit
Sales Revenue - Net $70,000 Net (= Parent - Contra) Credit

Tricky Question: Is Unearned Revenue a Contra Account?

It is a common misconception that unearned revenue, also known as prepaid or deferred revenue, is a contra account.

Unearned revenue is not a contra revenue account because it records deferred earnings for prepaid goods and services that are yet to be delivered and earned in the future, which are reported as a standard liability with a normal credit balance on a balance sheet.

Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.

3 Differences: Deferred Unearned Revenue vs. Contra Sales Revenue
Difference Contra Revenue Unearned Revenue
Debit / Credit Debit Credit
Account Type Contra Revenue Liability
Financial Statements Income Statement Balance Sheet

>>> Learn more about Prepaid Deferred Unearned Revenue

4. Expense Contra Account

A contra expense is a general ledger account with a credit balance that reduces the normal debit balance of a standard expense account in order to present the net value of a company’s expenses on its income statement, such as Expense Reimbursement or Purchase Discounts, Returns and Allowances.

Expense Accounts: Normal Balance
Expense Debit
Contra-Expense Credit

2 Examples of contra expense accounts most commonly presented on a company’s income statement:

4.1. Purchase Discounts, Returns and Allowances [Expense Contra]

Purchase Discounts, Returns and Allowances are contra expense accounts with a credit balance that reduce the normal debit balance of the main Purchase Expense account in order to present the net value of purchase expenses in a company’s income statement.

Income Statement >> Expenses >> Purchases
Line Item Amount Account Type Dr/Cr
Purchase Expenses - Gross $100,000 Parent Expense Debit
(Less: Purchase Discounts) ($15,000) (Contra Expense) Credit
(Less: Purchase Returns) ($10,000) (Contra Expense) Credit
(Less: Purchase Allowances) ($5,000) (Contra Expense) Credit
Purchase Expenses - Net $70,000 Net (= Parent - Contra) Debit

4.2. Expense Reimbursement [Expense Contra]

Expense Reimbursement is a contra expense account with a credit balance that reduces the normal debit balance of its related parent Expense account in order to present the net value of business expenses in a company’s income statement, such as the employee portion of health insurance benefits.

Income Statement >> Expenses
Line Item Amount Account Type Dr/Cr
Expense - Gross $100,000 Parent Expense Debit
(Less: Expense Reimbursement) ($10,000) (Contra Expense) Credit
Expense - Net $90,000 Net (= Parent - Contra) Debit

>>> Learn more about Expense Reimbursement

5. Equity Contra Account

Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares.

Equity Accounts: Normal Balance
Equity Credit
Contra-Equity Debit

5.1. Owner’s Drawing Account [Equity Contra]

Owner’s Draw is a contra equity account with a debit balance that records withdrawals and distributions of business assets for owner’s personal use to reduce the normal credit balance of Owner’s Equity and report the net value on a balance sheet of a sole proprietorship or partnership business.

Balance Sheet >> Equity >> Owner's Equity
Line Item Amount Account Type Dr/Cr
Owner’s Investment $100,000 Equity Credit
(Less: Owner Draws – Withdrawals and Distributions) ($10,000) (Contra Equity) Debit
Total Owner’s Equity $90,000 Net (= Gross - Contra) Credit

>>> Learn more about Owner’s Drawing Account

5.2. Repurchased Treasury Stock Shares [Equity Contra]

Treasury Stock, or Repurchased Shares, is a contra equity account with a debit balance that records the amount paid by a listed company to buy back its own shares from investors in order to reduce the normal credit balance of Shareholder Equity and report its net value on a balance sheet.

Balance Sheet >> Equity >> Stockholders’ Equity
Line Item Amount Account Type Dr/Cr
Paid-in Capital – Common and Preferred Stock $1,000,000 Equity Credit
(Less: Treasury Stock) ($100,000) (Contra Equity) Debit
Total Stockholders’ Equity $900,000 Net (= Gross - Contra) Credit

>>> Learn more about Repurchased Treasury Stock Shares

List of Contra Accounts

The following list summarizes the most commonly used contra accounts:

List of Contra Accounts
Account Type Contra Account Parent Account
Contra Assets Accumulated Depreciation Property, Plant and Equipment (Long-Term Fixed Assets)
Allowance for Doubtful Accounts (Provision for Bad Debts) Accounts Receivable
Discount on Notes Receivable Notes Receivable
Reserve for Obsolete, Unsold and Unusable Inventory Inventory
Contra Liabilities Discount on Bonds Payable Bonds Payable
Discount on Notes Payable Notes Payable
Short-Term Portion of Long-Term Debt Non-Current Borrowings
Contra Revenue Sales Discounts, Returns and Allowances Sales Revenue
Contra Expenses Purchase Discounts, Returns and Allowances Purchase Expenses
Expense Reimbursement Expenses
Contra Equity Owners’ Withdrawals and Distributions Owners’ Equity
Repurchased Treasury Stock Shares Shareholders' Equity
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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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