Final answer:
A contra account on a balance sheet serves to reduce the value of an associated asset, liability, or owners' equity account. It's used in accounting to portray the net position in financial statements such as the balance sheet of a bank, where assets must always be equal to liabilities plus net worth.
Step-by-step explanation:
A contra account on a balance sheet reduces either an asset, liability, or owners' equity account. When we talk about a bank's balance sheet, we deal with T-accounts, which clearly display the separation of assets on the left and liabilities on the right. The net worth or equity is indicated on the liabilities side to ensure the balance sheet balances. A clear example of this would be how deposits are treated; for a bank, the money deposited by customers represents a liability because it's money the bank owes to its depositors. Assets would include reserves, loans made to customers, and government securities like treasury bonds. Liabilities consist of customer deposits and any other debts.
The term 'net worth' is crucial as it represents the total assets minus total liabilities and is what constitutes the owners' equity part of the balance sheet. Depending on the financial health of the bank, net worth can be positive (for a healthy business) or negative (for a bankrupt firm). It's important to understand that, in accounting, a contra account effectively acts to reduce the value of the related account it is associated with.