Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue. If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. For both contra asset accounts, the entry is a debit to an expense and the credit is to the contra asset account. Let’s consider a fictional example of a small clothing retail business called “StyleMart” to illustrate the use of contra revenue accounts in financial accounting. Sales Discounts is a contra revenue account that records the value of price reductions granted to buyers in order to incentivize early payments. Examples include Net D cash discounts like 2/30 Net 60, where a full invoice payment is due in 60 days but a buyer will receive a 2% discount in case of an early settlement within 30 days.
This is done by separating the decreases that have occurred in the contra account from the original transaction amount. This allows the reader to see both the current and historical book values for a particular asset or liability. Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value.
The December 5th journal entries record the original sale, and the December 12th entries record the return and exchange. Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit. Accounting is how we tell a story about an economic event or financial transaction, such as a purchase or a withdrawal of money, for example.
A “discount,” in accounting terms, usually refers to a price reduction offered as an inducement to customers who pay their bills quickly, not to a “sale” price, which is simply incorporated into gross revenue. Sales allowances are price reductions offered to persuade customers to accept merchandise with damage or minor defects not serious enough to warrant a return. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts reduce accounts receivable, while accumulated deprecation is used to reduce the value of a fixed asset. A contra account is a negative account that is netted from the balance of another account on the balance sheet.
These https://www.bookstime.com/articles/contra-revenue-accounts tend to have a debit balance and are used to calculate net sales. In the sales revenue section of an income statement, the sales returns and allowances account is subtracted from sales because these accounts have the opposite effect on net income. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. Contra revenue is a general ledger account with a debit balance that reduces the normal credit balance of a standard revenue account to present the net value of sales generated by a business on its income statement. Examples of revenue contra accounts are Sales Discounts, Returns and Allowances.
Normal accounts on the general ledger will usually have a debit balance, while contra accounts are typically either zero or hold a negative credit balance. Contra accounts appear on the same financial statement as the related account. For example, an accounts receivable’s contra account is a contra asset account. This type of account can also be called the bad debt reserve or allowance for doubtful accounts.
If you own a landscaping company, your business’s operating revenue is derived from your services. Or, if you own a pie shop, your business’s operating revenue comes from selling the pies. When you record revenue in your accounting books will depend on the method of accounting you use. If you use accrual accounting, you will record revenue when you make a sale, not when you receive the money.
A company might decide to purchase its stock when the board of directors feel the stock is undervalued or when it wishes to pay its shareholders dividends. The sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods. It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company’s products that are causing customers to return goods.
This credit memorandum becomes the source document for a journal entry that increases (debits) the sales returns and allowances account and decreases (credits) accounts receivable. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase. The contra asset account then allows recording of the value factoring in depreciation. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet.
The natural balance in a contra asset account is a credit balance, as opposed to the natural debit balance in all other asset accounts. There is no reason for there to ever be a debit balance in a contra asset account; thus, a debit balance probably indicates an incorrect accounting entry.
The most common contra assets are accumulated depreciation and the allowance for doubtful accounts. For example, the debit will be to the expense account in an estimated uncollectible amount from a credit sale. The credit will be to the asset account or allowance for doubtful accounts. Contra revenue accounts show the deducting adjustments to gross revenue or producing net revenue. Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales.
Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. It’s crucial to have an accounting and bookkeeping team (whether outsourced or internal bookkeeping) to help ensure accuracy for your contra account. Better yet, consider investing in AI-powered accounting software to reduce mistakes.
Key Takeaways. A contra account is an account used in a general ledger to reduce the value of a related account. They are useful to preserve the historical value in a main account while presenting a decrease or write-down in a separate contra account that nets to the current book value.