A contra inventory account is a general ledger account with a credit balance. The credit balance in the contra inventory account will be combined with the debit balance in the inventory account when a balance sheet is prepared.
If a company’s inventory has a net realizable value (NRV) that is less than the cost of the inventory, it may choose to keep the original costs in its Inventory account and to reduce the reported amount of inventory through a contra inventory account such as Allowance to Reduce Inventory to NRV. For example, if the Inventory account has a debit balance of $40,000 for the cost of the goods on hand at a balance sheet date, but the net realizable value is only $37,000, the Allowance account will be adjusted to show a credit balance of $3,000.
