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LSDefine
Simple English definitions for legal terms
contra account
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A quick definition of contra account:
A contra account is a special type of account that reduces the value of another account. It's like a helper account that works in the opposite direction. For example, if you have an account for your car worth $10,000, you might also have a contra account for depreciation that reduces the value of your car account over time. This helps you keep track of the true value of your assets.A more thorough explanation:
A contra account is an account that reduces the gross valuation of an asset. For example, a company may have an asset account for inventory, but also have a contra account for inventory allowances to reduce the value of the inventory to its net realizable value. This allows for a more accurate representation of the company's financial position.
For instance, if a company has $100,000 worth of inventory, but expects to sell only $90,000 of it due to damage or obsolescence, the contra account for inventory allowances would be $10,000. This reduces the value of the inventory to its net realizable value of $90,000.
Another example of a contra account is accumulated depreciation, which reduces the value of a company's fixed assets to their net book value. This is important for accurately reporting the value of a company's assets on its balance sheet.