Contra Liability Account

AAA

DEFINITION of 'Contra Liability Account'

A liability account that is debited in order to offset a credit to another liability account. The contra liability account is used to adjust the book value of an asset or liability. When recording an entry into the contra liability account, the typical entry rules are reversed: adding to the contra account is a debit, whereas an addition to the liability account is typically a credit.

INVESTOPEDIA EXPLAINS 'Contra Liability Account'

Companies issuing bonds are likely to use contra liability accounts. If the bond is sold at discount, the company will record the cash received from the bond sale as cash, and will offset the discount in the contra liability account. For example, a $1,000 bond sold at $900 would result in the following journal entries: a $900 debit to the cash, a $1,000 credit to the Bonds Payable, and a $100 debit to Discount on Bonds Payable. The debit to the contra-liability account of $100 lets the company take into account the fact that the bond was sold at a discount.

Naming the journal entry for a contra liability account typically involves the use of the word “discount”. For example, a contra liability account for the Notes Payable would be called the Discount on Notes Payable. The value of the notes is calculated as the credit balance in Notes Payable less the debit balance in Discount on Notes Payable.

Contra liability accounts are not used as often as contra asset accounts. Contra asset accounts affect items such as inventory, which is adjusted in value more frequently than bonds or other fixed income securities that are considered liabilities.

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Contra Account

    An account found in an account ledger that is used to reduce ...
  3. Cash Accounting

    An accounting method where receipts are recorded during the period ...
  4. Inflation Accounting

    Special accounting techniques, which can be used during periods ...
  5. Discovery Value Accounting

    A method of accounting often used in the oil and gas, mining ...
  6. Amortized Bond

    A financial certificate that has been reduced in value for records ...
Related Articles
  1. Accounting Rules Could Roil The Markets
    Bonds & Fixed Income

    Accounting Rules Could Roil The Markets

  2. The Common-Size Analysis Of Financial ...
    Fundamental Analysis

    The Common-Size Analysis Of Financial ...

  3. Financial Statement: Extraordinary Vs. ...
    Fundamental Analysis

    Financial Statement: Extraordinary Vs. ...

  4. Detecting Accounting Manipulation
    Fundamental Analysis

    Detecting Accounting Manipulation

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center