A contra liability account is a liability account where the balance will be either a debit balance or a zero balance. Since a debit balance in a liability account is contrary to the normal or expected credit balance, the account is referred to as a contra liability account.
The most common contra liability accounts are Discount on Bonds Payable and Discount on Notes Payable. The debit balances in these accounts are amortized or allocated to Interest Expense over the life of the bonds or notes.
The credit balance in the liability account Bonds Payable minus the debit balance in the contra liability account Discount on Bonds Payable is the carrying value or book value of the bonds. The credit balance in Notes Payable minus the debit balance in Discount on Notes Payable is the carrying value or book value of the notes payable.
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