Definition of Contra-Liability Account
A contra-liability account is a liability account in which the balance is expected to be a debit balance. Since a debit balance in a liability account is contrary to the normal credit balance, the account is referred to as a contra-liability account.
Examples of Contra-Liability Accounts
Some contra-liability accounts include:
- Discount on Bonds Payable
- Bond Issue Costs
- Discount on Notes Payable
The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable.
The credit balance in the liability account Bonds Payable minus the debit balances in the contra-liability accounts Discount on Bonds Payable and Bond Issue Costs results in the carrying value or book value of the bonds. The credit balance in Notes Payable minus the debit balances in Discount on Notes Payable is the carrying value or book value of the notes payable.
If a corporation's liability accounts report the following balances: Bonds Payable of $10,000,000; Discount on Bonds Payable of $200,000; Bond Issue Costs of $50,000, the carrying value of the bonds is $9,750,000.