Contra Account – Essence and Examples

Step 16 is to understand contrary accounts. First of all we will come back to the essence of the T account. You remember that in order to record transactions we use T account. It is a simple form of an account which is in the form of T letter and left side is debit side and it is called a debit side and right side is called credit side.

And this is how the T account looks like on the top we have a name of the account and debit on the left side and credit on the right side. If we got to the accounting equation and relating it to the T account the left side of the accounting equation is debit side and all the balance is for asset accounts are on the left side debit and if we go the right side and the right side is called credit side as the right side of the T account and all the balances of the equity and liabilities are also showed on the credit side or on the right side of the question and right side of the T account.

So this is a covering of T account essence and relation of it to the accounting equation. Also what is important to remember that if we have assets usually balances of all assets category accounts are presented on the asset side of balance sheet and if we have equity and liabilities usually all the balances of equity and liabilities accounts are presented on the liabilities and equities side of balance sheet.

So when asset accounts have debit side they go on the asset side of the balance sheet and liability and equity accounts have credit balance and then go on liabilities and equity side of balance sheet. These are main rules however certain assets on the balance sheet must be recorded and presented at their net value.

So we have gross value, we have certain items which decrease that value and on the balance sheet we must include net value of those assets. Usually if we want to decrease value of certain assets we use special accounts and those special accounts they have balance contrary to the asset account balance so those accounts have credit balance and they decrease value of asset and afterwards that difference is reflected on the balance sheet.

And those special accounts they are called contrary accounts. They are called contrary accounts because they have opposite balance, credit balance to the asset account and they decrease value of asset and they do not go separately on the balance sheet but they decrease the value of asset.

So we can analyze examples in order to understand better what our contrary accounts and how we are used. Let’s assume we have an asset which has a cost and that cost is reflected on the debit site of the account so it has debit balance. Also we have accumulated depreciation and accumulated depreciation, which is reflected on the credit side of the account that has all the time credit balance so this is the opposite balance to the asset account.

And other we will show on the balance sheet the difference between asset cost and accumulated depreciation. So this means that we do not show on the balance sheet separately asset cost and separately accumulated depreciation but on the asset side we will show the difference between asset cost and accumulative depreciation between the debit and credit balances of these two separate accounts.

An example can be like this if we have equipment the cost of that equipment is $9,600 and we have accumulated depreciation and accumulated depreciation account for equipment has credit balance of $3,200 we calculate net book value. Net book value the difference between cost and accumulated depreciation so from cost we deduct accumulated depreciation and get $6,400 and this a month goes to the balance sheet.

Not cost, not accumulated depreciation separately, but on the asset side of balance sheet we show net book value of the asset and here accumulated depreciation account is a contrary account to the equipment because it decreases the value of equipment and only the difference is showed on the balance sheet.

Another example when we use contrary accounts it is accounts receivable and provision foreign collectible accounts. We have accounts receivable gross and this account has debit balance and we have allowance from collectible accounts and this account has credit balance.

And on the balance sheet we do not show separately those balances but we deduct from gross amount of accounts receivable allowance and we show the difference on the asset side of the balance sheet. An example can be like this. We have accounts receivable account and balance is on the debit side by $5460 and we have allowance from collectible accounts and the balance is on the credit side $124 and then we calculate that value of accounts receivable by deducting from the gross amount allowance and net value $5,336.

This amount goes to the balance sheet so this means that we own the balance sheet show net amount of accounts receivable and we do not show separately accounts receivable gross and accounts and allowance foreign collectible accounts separately so net value is showed on the balance sheet and here allowance for uncollectible accounts again is contrary account to accounts receivable since it decreases value of accounts receivable and difference go separately on the balance sheet on the asset side.

Of the accounts the credit balance is like a accounts payable, equity or credits from banks we are showed on the liabilities and equity part of the balance sheet and show it separately so they are not contrary accounts. We do not decrease value of an asset but we are separate categories of equity and liabilities.

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