Contra Liability Account
What Is a Contra Liability Account
In finance, a contra liability account is one that is debited for the explicit purpose of offsetting a credit to another liability account. Contra liabilities reduce liability accounts and carry a debit balance. At the end of the day, the contra liability account is utilized to change the book value of an asset or liability.
Understanding Contra Liability Accounts
A contra account is utilized in a general ledger to reduce the value of a connected account when the two are gotten together. A contra account's natural balance is something contrary to the associated account. In the event that a debit is a natural balance recorded in the connected account, the contra account records a credit. For instance, the contra account for a fixed asset is accumulated depreciation.
There are four key types of contra accounts — contra asset, contra liability, contra equity, and contra revenue. Contra asset accounts incorporate allowance for doubtful accounts and the accumulated depreciation. Contra asset accounts are recorded with a credit balance that diminishes the balance of an asset.
A liability that is recorded as a debit balance is utilized to diminish the balance of a liability. The balance of a contra liability account is a debit balance. This account diminishes the value of the liability. Contra Liability a/c isn't utilized as much of the time as contra asset accounts. It isn't classified as a liability since it doesn't address a future obligation.
Instances of contra liabilities remember a discount for notes or bonds payable. Contra liabilities hold a debit balance. Contra liability accounts are not quite as well known as contra asset accounts.
Companies that issue bonds are probably going to utilize contra liability accounts. In the event that the bond is sold at a discount, the company will record the cash received from the bond sale as "cash", and will offset the discount in the contra liability account.
Note that accountants use contra accounts as opposed to reduce the value of the original account straightforwardly to keep financial accounting records clean.
Illustration of a Contra Liability Account
For instance, a $1,000 bond sold at $900 would bring about the accompanying journal sections:
- 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 commonly includes the utilization of "discount." For instance, 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 above model, the debit to the contra liability account of $100 allows the company to perceive that the bond was sold at a discount.
- A contra liability account changes the value of liabilities held by a company on its balance sheet.
- A contra liability might be created due to the issuance of bonds or other debt securities.
- A contra account is an account utilized in an overall ledger to reduce the value of a connected account.