When would you use a contra account, and how would you do it?
submitted by Yurembam chandrakanta

kelvin

You'd use one when you want to show the actual value of an asset or liability after some deductions. Like with accounts receivable, if you think some customers might not pay, you set up an allowance for doubtful accounts as a contra asset account. To do this, you record a negative entry in that contra account, which reduces the total receivables on the financial statements.

samzar

A contra account is basically a way to keep things honest. If you have, say, equipment worth $10,000 but expect depreciation, you'd have a contra asset called accumulated depreciation. You just record the depreciation as a negative amount in that account, so your books show the equipment's net value.

relephant

A contra account offsets another account, but keeping the two accounts separate makes it easier to keep records. For example, if you have accounts receivable but want to account for people who won't pay, you'd use an "allowance for doubtful accounts" as a contra asset.

You can create the contra account by opening an account with a negative or opposite balance to the main account, and then you record entries there that offset the original account's balance.