Contra account - What is a contra account?

Definition: Contra accounts are set up in order to offset the balance of a related account.

A contra account is used in order to better portray the relationship between certain debits and credits with the overall financial structure of an entity.

How a contra account is used in practice:

There are many situations where one account is used in order to offset another account. One common example is accumulated amortization, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account.

One important difference: assets are debited when increased, and contra-assets are credited when increased.

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

Contra accounts increase transparency

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