Contra accounts are essentially any account found within the accounting records of a corporation or other official entity that carries a balance that is intended to offset the balance of related account. A contra account is considered to be the flip side of the story with the opposite account, and is often used as a means of demonstrating the relationship between various debits and credits within the overall financial structure of the corporation.
When it comes to an example of how one account offsets another account, perhaps the easiest illustration would be to take an account that records accumulated amortization into account. In order to balance the debit position associated with the amortization, an opposite or contra account with the balance sheet structure will represent a credit that essentially offsets the amortized figure. This helps to maintain a balance between debits and credits in the bookkeeping process.
However, it must be understood that the concept of the contra account does not always involve a credit offsetting a debit. The basic function of this type of account is simply to be an opposite of another account. This means that an account showing a debit would be a type of contra account usually known as a contra-liability account. By the same token, an account with a credit would be balanced by a contra-asset account.
The concept of a contra account can also apply to investments as well. A broker who engages in working with another broker to successfully complete both the buy and the sell components of a transaction is functioning within a contra environment. Each broker is essentially the contra broker to the opposite broker, just as in accounting one account act as the opposite of another account.
In general, a contra account is simply a means of making sure that all aspects of transactions are accounted for in an orderly and timely manner. By employing this type of account, it is possible to look at the accounting records of a given corporation and trace back the history related to various debits and credits carried on the books, and how they relate to one another.
