All successful businesses not only operate with a finite list of checks and balances but have many essential tools in place, such as budgets and business plans, to help them manage their operations successfully and hopefully be profitable. System that may be used is a contra account which offset another account.
The function of a contra account is simply to be an opposite of another account. There are contra-asset accounts that have a positive balance and offset negative balances of the corresponding asset. On the reverse side, there is contra-liability with a debit balance offsetting the credit balance of the corresponding liability.
Contra accounts tends to give the full picture when it comes to corporate finances as it is the main function of the account to offset the balance of a connected account. Within the overall financial structure of a corporation, contra accounts tend to show the association between various debits and credits. These types of accounts will be shown in the accounting records of a corporation.
The word contra is simply defined as “against or in opposition or contrast to.” Contra accounts also apply to investments. For example, if there are two brokers working together to both purchase and sell parts of a transaction, they are technically working within a contra account environment.
The average investor doesn’t really need to concern himself about setting up contra accounts. Truly, contra accounts are the tool of financial professionals and is beyond the needs of an average person working towards setting up a retirement plan.
However, if you are the owner of your business and manage your books as well, you certainly have a list of items for credits and debits in your balance spreadsheets – those particular items that offset each other would be consider a contra account.