Contra accounts are used to better evaluate financial performance related to certain functions or assets. A contra account customarily carries opposite types of balances (debits or credits) to their respective parent’s traditional balance based on the type of account. Contra accounts are used to make adjustments, allocate utility, set allowances and record performance.
The trial balance is a special report used by accountants and bookkeepers. It is NOT a management nor a financial report. Its primary purpose is verification of account balances and compliance to the dual entry system (debits equal credits). It is generally utilized as the first step in the closing process for interim and annual reporting. Experienced bookkeepers use the trial balance to spot egregious errors and obvious discrepancies.
Both contra and atypical values are reported with parenthesis. The same presentation format is used when reporting contra and atypical values on the profit and loss statement (income statement).
Contra information is always reported in parenthesis. Other financial information is also reported using parenthesis with the two primary financial statements. This lesson explains parenthesis in balance sheet accounts.
Contra accounts are utilized to help present clearer information to readers of financial reports. They are used to improve the decision model. This lesson provides several different methods to exercise the advantages of this accounting ledger.
