A valuation account is paired with an asset or liability account, and is used to offset the value of the assets or liabilities recorded in the account with which it is paired. The result of this account pairing is a net balance, which is the carrying amount of the underlying asset or liability. The "valuation account" term is a less-used phrase that has the same meaning as the contra account concept.
Examples of valuation accounts are:
- Allowance for doubtful accounts (paired with the trade accounts receivable account)
- Allowance for obsolete inventory (paired with the inventory account)
- Accumulated depreciation (paired with the various fixed asset accounts)
- Discount on bonds payable (paired with the bonds payable account)
- Premium on bonds payable (paired with the bonds payable account)
The valuation account concept is useful for estimating any possible reductions in the values of assets or liabilities prior to a more definitive transaction that firmly establishes a reduction.
Valuation accounts are only used in accrual basis accounting. They are not used in cash basis accounting.
A valuation account is also known as a valuation reserve or contra account.