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.
BREAKING DOWN '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.