What is a Contra Liability Account
In finance, a contra liability account is a liability account that's debited for the explicit purpose of offsetting a credit to another liability account. In other words, the contra liability account is used to adjust the book value of an asset or liability.
BREAKING DOWN Contra Liability Account
Companies that issue 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
- A $100 debit to Discount on Bonds Payable.
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.
In the aforementioned example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.