contra-revenue account

The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. However, if the billing office stopped there, you would overstate your assets and net income. You must also report the amount that you can reasonably expect will not be paid, if it is estimable and probable. You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain.

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. Since the entry for cash sales is recorded as a credit in a revenue account, then a return on sales will be recorded as a debit in the revenue contra account, Return on Sales or Sales Returns and Allowances. Although you may be familiar with the normal balance requirements of each classification, a contra account will have the opposite requirement. Contra asset account examples include any transaction made on a contra account to balance out the debit account. Contra asset examples can be accumulated depreciation, discounts on notes receivable, trade accounts receivable, and obsolete inventory reserves.

Journalbuchungen

The discussion to this point has included all five types of accounts. Asset, Liability, and Stockholders’ Equity are accounts that appear on the balance sheet. Revenue and Expense are accounts reported on the income statement. Maintaining a contra account is important as it provides more clarity on the dealings of a company. It clearly shows how the balances are offset and helps in establishing the matching principle. Contra accounts help the user of the financial statement to get clear information, which helps in making the statement more understandable.

contra-revenue account

One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. To report the real value of the financial statement, you will need to record the amount you can reasonably estimate that will probably effect the financial statement classification. It’s crucial to have an accounting and bookkeeping team (whether outsourced or internal bookkeeping) to help ensure accuracy for your contra account.

Contra Revenue Account

If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account. You will need to debit the contra revenue account and credit the Accounts Receivable account. You might have a sales return contra account or a sales discounts account. The Sales Discounts account shows the discounts you gave to a customer.

Is contra revenue account an asset or liabilities?

A contra liability account is a liability account that is debited in order to offset a credit to another liability account. An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid.

In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000. Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and credit to Sales for $100,000.

Examples of Contra Asset Accounts

Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative. On the other hand, if you’re looking at a high-flying growth stock that reports new bookkeeping for startups revenue growth records each quarter but has a massive allowance for doubtful accounts, there may be problems ahead. So, the chart above clearly displays the difference between contra assets and contra revenue. Unlike the asset account, the natural balance of the revenue account is credit.

contra-revenue account

Let’s have a clear cut difference between contra asset and contra revenue. For example, if the balance of accumulated depreciation increases from $20,000 to $50,000, this means that the depreciation expense amounts to $30,000, which will be listed in the income statement. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible. The net amount – i.e. the difference between the account balance post-adjustment of the contra account balance – represents the book value shown on the balance sheet. The December 5th journal entries record the original sale, and the December 12th entries record the return and exchange.

Understanding Contra Accounts

The company predicts which accounts receivable won’t be paid by customers and writes those off. When the account receivable is written off, it is added to bad debt expense on the income statement and placed in the contra account. If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it. It could be growing with bad accounts, and cash flow will be affected. In this example, the contra revenue accounts (Sales Returns and Allowances and Sales Discounts) are used to provide a more accurate and detailed representation of the company’s revenue position. On the income statement, the net sales revenue will be reported as $47,000 ($50,000 – $2,000 – $1,000), reflecting the impact of the contra revenue accounts.

  • 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.
  • This would let users of the financial statements calculate the book value of the liability.
  • The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it.
  • For most businesses, the majority of its revenue is derived from sales.
  • However, if the billing office stopped there, you would overstate your assets and net income.

In simple terms, when one side of the account of an item partially or completely offsets the other side of the same account, it is said to be a contra account. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. Balance of such accounts are under debit side, while revenue balances are under credit side. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity. It’s normal for businesses to receive refund requests or returns from customers. If your business owns stocks in other companies, you will receive dividend payments.