Adjunct Account

What Is an Adjunct Account?

An adjunct account is an account in financial reporting that increases the book value of a liability account. An adjunct account is a valuation account from which credit balances are added to another account. The concept of an adjunct account can be contrasted with the concept of a contra account, which decreases the amount of a liability account through a debit entry.

An adjunct account is also sometimes just referred to as a valuation account.

How an Adjunct Account Works

An adjunct account consists of entries that increase the book value of a liability account. Adjunct accounts are intended to provide additional detail to accounting figures and increase the overall transparency of financial reporting.

Adjunct Account vs. Contra Account

An adjunct account may be contrasted to a contra account. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. For example, in a contra account, a discount on bonds payable account would result in a debit to a liability account.

A contra account is used to reduce the value of a related account when the two are netted together. Or, in simpler terms, a contra account offsets the balance of a corresponding account. It allows a company to report the original amount and also report a reduction so that the net amount will also be reported. A contra account's natural balance is the opposite of the associated account, but they are reported on the same financial statement. If a debit is the natural balance recorded in the related account, the contra account records a credit.

A contra account is used in a general ledger. The net amount may also be referred to as the carrying amount or the net realizable amount.

For example, a contra account to Accounts Receivable is the Allowance for Doubtful Accounts or Bad Debt Reserve. Since it is a contra asset account, the Allowance for Doubtful Accounts must have a credit balance. The balance in this account represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. 

So, if the Accounts Receivable account has a debit balance of $20,000 and the Allowance for Doubtful Accounts has a credit balance of $2,000, any readers of the company's balance sheet will see that customers owe $20,000 for past purchases but the company does not expect to collect $2,000 of the $20,000. 

Other types of contra accounts include Accumulated Depreciation, Discount on Notes Payable, Bond Issue Costs, Discount on Notes Receivable, LIFO Reserve, and certain investment accounts.

Example of an Adjunct Account

If a company issues bonds, the Unamortized Premium on Bonds Payable account (sometimes simply called Bond Premium account) is an adjunct account because its credit balance is added to the amount in the Bonds Payable account (in order to determine the book value of the bonds). The unamortized premium and the bond liability, when combined, represent the actual liability of the issuer.

For example, if a company issues $100,000 of its bonds payable for $97,000, it will be issuing the bonds at a discount rate of 3%. The company's 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. The Discount on Bonds Payable account is a contra account because it is a liability account with a debit amount.

Some accountants might apply the term adjunct accounts to both the Discount on Bonds Payable and for the Premium on Bonds Payable while others might use the term valuation accounts instead.

In this case, 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.