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This decreases the number of outstanding shares and affects per-share metrics. Contra accounts are used across various financial account categories to provide a more precise representation of balances. Each type reflects reductions from gross amounts, helping users understand the true value of assets, liabilities, equity, and revenues. Nor would it count as a liability as it does not reflect a future obligation. A contra account is an asset account that is kept at either a negative or zero balance and is used on a balance sheet to offset the positive balance of a paired asset. To put it another way, a contra account is an account listed within a general ledger with the purpose of capturing the reduced value of a paired or related account when the two are added together.<\/p>\n<\/p>\n
There are several situations in which a contra inventory account can be used. One is when market prices are lower than inventory costs, which will trigger a lower of cost or market adjustment. A third possible use for the account is when some of the inventory is no longer listed in the bills of material for current products, and so will not be used. Contra accounts are a little tricky to think about when you are first starting out. Just remember that they carry an opposite balance than the other accounts in their account type. Sometimes, even in accounting, there are welcome surprises, e.g., when a previously written-off account pays unexpectedly.<\/p>\n<\/p>\n