Contra Account Definition + Journal Entry Examples

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contra revenue account examples

The sales discounts account contains the amount of sales discounts given to customers, which is usually a discount given in exchange for early payments by them. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid). The allowance for doubtful accounts is used to reduce the net income by the estimated amount of uncollected receivables. This account helps to give a more accurate picture of the company’s financial position. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.

Accumulated depreciation reflects the reduction in value of a fixed asset. A contra liability is an account in which activity is recorded as a debit balance and is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts. It is not classified as a liability since it does not represent a future obligation. The company has a contra asset account for accumulated depreciation expense and a separate asset account for equipment cost.

It is also advisable to regularly (at least once a month) conduct a collective (possibly in groups) study of existing guidance documents in the accounting Department, as well as timely updates of the software used. The order must clearly define the forms of submission of documents to the accounting Department, the timing of their submission, and the persons responsible for this. Strict penalties should also be imposed for late and poor-quality processing of documents.

What is a Contra Asset AccountWhat is a Contra Asset Account

There are three commonly used contra revenue accounts, which are noted below. Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.

  1. This attachment is necessary since it functions hand-in-hand with a debit balance to fully disclose the total value of an asset and how much is its value with respect to ….
  2. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance).
  3. 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.
  4. The sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods.

Contra asset accounts are recorded with a credit balance that decreases the balance of an asset. A key example of contra liabilities includes discounts on notes or bonds payable. Contra liability accounts are not as popular as contra asset accounts.

Let us assume that Zawarudo Company sells $100,000 worth of commodities on credit. It will debit accounts receivable for $100,000 and credit sales for $100,000. If a client returns $500 of these commodities, Zawarudo Company will debit sales returns and allowances for $500 and will credit accounts receivable for $500. The Zawarudo Company’s income statement will report the gross sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

What is Contra Account?

However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming.

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. Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.

A Contra liability account is an account that is used to offset another liability account on the balance sheet. Contra liability accounts are typically used for bonds, notes payable, and other indebtedness. At the same time, it is necessary to clearly and clearly set up accounting for the receipt of documents to the accounting Department. In addition, it is important, if possible, to assign the responsibility for obtaining corrected documents to the same perpetrators. A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity).

For example, a company might have a contra asset account for depreciation expense and a separate asset account for equipment cost. Contra revenue account can be used in all payroll withholding sorts of businesses for the proprietor’s advantage. The idea of this account is to counterbalance the revenue account on the income statement for the privacy of the owner.

If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. On the other hand, contra revenue account sales discount includes money, volumes, trades, or casual discounts as a way for the stocks to move into a faster rate than the usual ones. It can be used in a lot of business types, and it is offered to those customers who are loyal and committed to the brand itself. Contra revenue account sales returns are very convenient in showing the results on the net revenue of refunds and returns. An example of this can be found in the retail industry where the goods of the company do not meet the expectations of their clients.

contra revenue account examples

Typically, employees of American federal companies receive a form W-2, which reflects the income they received during the year. Proper organization of internal document flow in the company, which must be established by order of its head, is of great importance for eliminating shortcomings in accounting. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

Contra Revenue Accounts

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. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. An example of contra equity with buying back shares or stock would be a company that has issued shares to the public. The contra equity account would be used to offset the equity account on the balance sheet. Contra comes from a Latin contra meaning “against” or “opposition.” Contra revenue account usually means a deduction from the gross revenue, which results in net revenue.

Knowing the balance between gross revenue and net revenue, and the cause of difference will surely benefit your business. A comprehensive way to determine the correctness of accounting in an organization is to compare the results of inventory with accounting data on the corresponding date. As you know, inventory should cover not only checking inventory, but also all assets, liabilities, etc. During the inventory, real data must be established for all accounting accounts (balance sheet items) on the corresponding date. You can also record contra revenue within the sales account, but this means that it will be buried within the total amount of revenue reported, so that management cannot easily determine the amount of contra revenue. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account.

Therefore, for these three, the debit balance actually represents a negative amount. 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. 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. The main advantage of using separate contra revenue accounts is that each one provides targeted information about the individual deductions taken from sales.

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