What is a contra account? Let’s go through the concept of contra accounts using lots of examples!

The main thing to understand about contra accounts is that contra means opposite. Contra accounts are linked with another account, and have an opposite balance. The usual pattern is gross amount minus the amount in the contra account is net amount.

Let’s first take a look at contra accounts on the balance sheet. As you know from studying the basics of debits and credits, balance sheet accounts have a natural state. Assets accounts have a debit balance. Liability accounts have a credit balance. Equity accounts have a credit balance. A contra account has an opposite balance. A contra asset account has a credit balance. A contra liability account has a debit balance. A contra equity account has a debit balance. Remember that contra accounts are always linked with another account, they don’t exist in isolation. A contra asset account is not the same as a liability. A contra liability account is not the same as an asset.

Let’s move from the balance sheet to the income statement. Income statement accounts can also have a contra account. For expense accounts, the natural state is a debit balance. For Revenue accounts, the natural state is a credit balance. A contra expense account has a credit balance. A contra revenue account has a debit balance. Remember that contra accounts are always linked with another account, they don’t exist in isolation. The following income statement contra account examples will show you why!


A related video on debits and credits, using DC ADE LER to explain it, can be found at https://www.youtube.com/watch?v=b93KBmcXanI


Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!