Definition of Valuation Account
In accounting, a valuation account is usually a balance sheet account that is used in combination with another balance sheet account in order to report the carrying amount or carrying value of an asset or liability.
The benefit of a valuation account is that the amount in the main account is not changed, since the needed adjustment(s) are contained in a separate account.
Examples of Valuation Accounts
A common example of a valuation account is the contra account Allowance for Doubtful Accounts, which is associated with the balance sheet account Accounts Receivable.
The combination of the credit balance in Allowance for Doubtful Accounts and the debit balance in Accounts Receivable is the net realizable value of the company’s accounts receivable.
Other valuation accounts associated with assets include Discount on Notes Receivable, Accumulated Depreciation, and allowance accounts used with inventory and investments.
Two examples of valuation accounts associated with a liabilities are Bond Issue Costs and Discount on Bonds Payable. The debit balances in these valuation accounts will be combined with the credit balance in Bonds Payable in order to report the carrying value or carrying amount of the bonds. Premium on Bonds Payable is a valuation account with a credit balance.
