What is a Valuation Account?

A valuation account contains an offsetting negative balance that reduces the carrying amount of the asset or liability account with which it is paired. The result of this account pairing is a net balance, which is the carrying amount of the underlying asset or liability. The valuation account concept is useful for estimating any possible reductions in the values of assets or liabilities prior to a more definitive transaction that firmly establishes a reduction. Valuation accounts are only used in accrual basis accounting. They are not used in cash basis accounting.

Examples of Valuation Accounts

Examples of valuation accounts are as follows:

Allowance for doubtful accounts (paired with the trade accounts receivable account)
Allowance for obsolete inventory (paired with the inventory account)
Accumulated depreciation (paired with the various fixed asset accounts)
Discount on bonds payable (paired with the bonds payable account)
Premium on bonds payable (paired with the bonds payable account)

Presentation of Valuation Accounts

Valuation accounts appear on the balance sheet. If their balances are quite small, they may be merged for presentation purposes with the account with which they are paired, so that you do not see a line item for them.

Terms Similar to Valuation Account

The "valuation account" term is a less-used phrase that has the same meaning as the contra account concept. A valuation account is also known as a valuation reserve or contra account.