Let's illustrate adjunct and contra accounts with bonds payable. If a corporation issues $100,000 of its bonds payable for a price of 97, it will be issuing the bonds at a discount of 3%. Its journal entry will include a debit to Cash for $97,000; a credit to Bonds Payable for $100,000; and a debit to Discount on Bonds Payable for $3,000. Discount on Bonds Payable is a contra account because it is a liability account with a debit amount. The carrying value of the bonds will begin at $97,000 since the $100,000 in Bonds Payable is offset by the $3,000 debit in Discount on Bonds Payable.
If a corporation issues $300,000 of bonds at a price of 102, it will be issuing the bonds at a premium of 2%. The journal entry will include a debit to Cash for $306,000; a credit to Bonds Payable for $300,000; and a credit to Premium on Bonds Payable for $6,000. Since a credit balance is the normal balance for a liability account, the account Premium on Bonds Payable cannot be referred to as a contra account. Here is where the term adjunct account is used. Immediately after the bonds are issued, the bonds will have a carrying value of $306,000 ($300,000 PLUS $6,000).
Some people might use the term adjunct accounts for both the Discount on Bonds Payable and for the Premium on Bonds Payable. Others might use the term valuation accounts.
Other examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, Discount on Notes Payable, Bond Issue Costs, Discount on Notes Receivable, LIFO Reserve, and certain investment accounts.
