What is a contra liability account?

In general, a contra account offsets another, related account, with the result being a reduced net balance for the two accounts. A contra liability account reduces the balance in a liability account. Thus, a normal liability account has a credit balance, so a contra account associated with it has a debit balance. A contra account may also have a zero balance, if no offset against a related liability account is currently needed.

The following are examples of contra liability accounts:

• Bond discount account. This account offsets the bond payable account. When netted together, the two accounts yield the carrying value of a bond.
• Gain on debt reduction. This account offsets the remaining balance in a loan payable account in the amount of any negotiated reduction in debt. This presentation is rarely used, in favor of directly reducing the balance in the loan payable account and reporting the reduction as a gain on the income statement.

In practice, contra liability accounts are rarely used. Contra accounts are more commonly paired with asset accounts, such as accounts receivable or inventory, to reduce the carrying values of those assets.

Similar Terms

A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired.

Related Topics

Current liability overview 
What are liabilities? 
What is a contingent liability? 
What is a contra account? 
What is contra revenue?