A contra account is an account which reduces the balance of an account to which it is paired.
Contra accounts can exist for all of the five account types: asset, liability, equity, income, and expense accounts. However, some contra accounts are more common than others.
A contra account has the opposite normal balance as the account to which it is paired. For example, asset accounts have a normal debt balance. Thus, a contra asset account will have a normal credit balance, as its role is to offset the carrying value of whatever asset account it is paired with. Likewise, liability accounts have a normal credit balance. Thus, a contra liability account will have a normal debit balance.
Two common contra accounts are accumulated depreciation and allowance for doubtful accounts. Accumulated depreciation is the aggregation of an asset’s depreciation expense since the asset was acquired. It reduces an asset’s carrying value. Allowance for doubtful accounts reduces the carrying value of accounts receivable. Since both accumulated depreciation and allowance for doubtful accounts are contra asset accounts, they both carry normal credit balances so as to offset the normal debit balances of their corresponding asset accounts.
Contra accounts are also common for other account types. For example, treasury stock is a common contra equity account used by public companies which regularly purchase their own stock. A common contra revenue account is allowance for sales returns. This account is common for retail businesses and represents the estimated amount of product which will be returned.
