Legal Definitions - contra account

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.