The sales returns contra sales account records the sales value of goods returned by a customer. The net balance of the two accounts shows the net value of the sales made by the business for the accounting period. The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue. The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue.
An entry which affects both cash and bank accounts is called a contra entry. The debit and credit aspects of the transaction are recorded in the cash book itself in contra entries. Another contra asset listed on the balance sheet is accumulated depreciation.
This reduces the amount of the carrying value of a company’s fixed asset to account for the wear and tear over the asset’s useful life. Fixed assets are often listed on the balance sheet as property, plant and equipment.
When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance. The net balance of the two accounts shows the net value of the sales after discounts.
Contra assets and contra liabilities are listed on a company’s balance sheet and carry balances opposite of their related accounts. Unlike regular assets and liabilities, contra assets typically keep a credit balance and contra liabilities typically keep a debit balance. Managers and investors must understand contra accounts to accurately analyze a company’s balance sheet and determine the organization’s financial position.
The accumulated depreciation account appears on the balance sheet as a credit and is a reduction from the total amount listed for fixed assets. Some companies choose not to include accumulated depreciation on the balance sheet and simply list the net amount of property, plant and equipment. 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.
What are two examples of contra revenue accounts and when are these accounts used?
contra revenues account definition. A revenues account with a debit balance instead of the usual credit balance. Examples include sales returns, sales allowances, and sales discounts.
A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account.
A transaction is made under the sales return account when a customer returns a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items.
- Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
- A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance.
- Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect.
This type of account could be called the allowance for doubtful accounts or bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
Contra accounts are reported on the same financial statement as the associated account. For example, a contra account to accounts receivable is a contra asset account.
When a company sells its products or services to customers on credit, the company records the amount sold in its accounts receivable account. Typically, a company fails to collect all of the money owed by customers making purchases on credit. The amount a company records as allowance for doubtful accounts is the amount from its accounts receivable the company considers uncollectible. DebitCreditCash10,000Accounts Receivable25,000Interest Receivable600Supplies1,500Prepaid Insurance2,200Trucks40,000Accum. Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable.
Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset.
Contra Asset Account
What is an example of a contra revenue account?
Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account).
The net of these two figures is typically reported on a third line. Another example of a contra asset account is the accumulated depreciation account which reduces the reporting value of capital assets. Allowance for obsolete inventory or obsolete inventory reserve are also examples of contra asset accounts. Sales returns is a contra revenue account as the figure is a negative amount net against total sales revenue.
Contra Equity Account
It would appear on the company’s income statement in the revenue section. A contra account offsets the balance of a corresponding account.
If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500.
Transactions made to contra accounts are presented on a company’s financial statements under the related account. Contra accounts are important because they allow a company to follow the matching principle by recording an expense initially in the contra asset account. The contra asset account is later reduced when the expense is recorded. Business owners should understand the functions of contra accounts and their importance to maintaining accurate financial records. Contra accounts offset the balances of their related accounts.
Define Contra Revenue Account
The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. Allowance for doubtful accounts is a common contra asset listed on a company’s balance sheet under accounts receivable.