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Definition: Contra Liability Account
Contra liability is a debit balance to offset credit balance in a liability account. Generally, liability account has credit balance. As having a debit balance in a liability account is contrary to the liabilities, this is called contra liability account.
The most common contra liability account is the discount on the bonds payable and the gain on reduction of debts. For example, a Rs. 100 bond sold at discount for Rs. 80 will have a Rs. 80 debit to the cash account and Rs. 100 credit to bonds payable. To offset the difference of Rs. 20, a Rs. 20 debit to the discount on bonds payable. The contra liability account denotes the bonds being sold at discount.
Contra liability accounts are seldom used in practice. They are generally paired with accounts of assets such as inventory or accounts receivables to reduce their value in books.
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