What is Contra Account?

A Contra Account is a general ledger account that is used to reduce the value of a related account. Its natural balance is the opposite of the associated account. Contra accounts provide more detailed information on the balance sheet by showing the original cost and the reduction separately, rather than just a single net value.

For Startups: The most common contra account a startup will encounter is "Accumulated Depreciation." This account is paired with a fixed asset account like "Computers" or "Equipment." It shows the total depreciation expensed for those assets to date. Another example is "Allowance for Doubtful Accounts," which reduces the value of Accounts Receivable.

Example: A company has Equipment worth ₹10 Lakhs. Its Accumulated Depreciation is ₹3 Lakhs. On the balance sheet, both figures are shown, resulting in a net book value of ₹7 Lakhs for the equipment.