Definition: Contra Accounts are set up for the purpose of offsetting the balance of a related account.
A contra account is considered to be used as a way of showing the relationship between certain
debits and
credits with the overall financial structure of an entity.
How it is used in Practise:
There are a number of situations where one account is used to offset another. One popular example is accumulated
amortization, which is a contra-
asset account; meaning that it acts in the opposite way of a regular asset account.
Assets are debited when increased, and contra-assets are credited when increased.
In this way, the accumulated amortization account would offset the related asset account, which is recorded as a debit. It is important to note that there are also contra-liability accounts, where an account with a debit balance offsets a
liability account.
Transparency
By using the concept of a contra account, it is possible to simply look at the accounting records of a given corporation and trace backwards the history related to certain debits and credits in the books, and how they are related to one another.