what is a contra account 
a contra account is used in a general ledger to reduce the value of a related account when the two are netted together a contra account s natural balance is the opposite of the associated account if a debit is the natural balance recorded in the related account the contra account records a credit for example the contra account for a fixed asset is accumulated depreciation investopedia madelyn goodnightunderstanding a contra accountcontra accounts are reported on the same financial statement as the associated account for example a contra account to accounts receivable often called allowance for doubtful accounts is a contra asset account this type of account could be called the allowance for doubtful accounts or a bad debt reserve the balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible the amount is reported on the balance sheet in the asset section immediately below accounts receivable the net of these two figures is typically reported on a third line accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean if a contra account is not used it can be difficult to determine historical costs which can make tax preparation more difficult and time consuming by keeping the original dollar amount intact in the original account and reducing the figure in a separate account the financial information is more transparent for financial reporting purposes for example if a piece of heavy machinery is purchased for 10 000 that 10 000 figure is maintained on the general ledger even as the asset s depreciation is recorded separately contra accounts provide more detail to accounting figures and improve transparency in financial reporting types of contra accountsthere are four key types of contra accounts contra asset contra liability contra equity and contra revenue contra asset accounts include allowance for doubtful accounts and accumulated depreciation contra asset accounts are recorded with a credit balance that decreases the balance of an asset a key example of contra liabilities includes discounts on notes or bonds payable contra liabilities hold a debit balance contra liability accounts are not as popular as contra asset accounts a contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability the balance of a contra liability account is a debit balance this account decreases the value of the liability contra liability a c is not used as frequently as contra asset accounts it is not classified as a liability since it does not represent a future obligation the third contra type is contra equity these contras reduce the equity account and carry a debit balance contra equity reduces the total number of outstanding shares on the balance sheet the key example of a contra equity account is treasury stock which represents the amount paid to buyback stock last for contra revenue accounts there are sales discounts sales allowances or sales returns contra revenue reduced gross revenue resulting in net revenue these contra revenue accounts tend to have a debit balance and are used to calculate net sales 