When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full. To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R. At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time.
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. Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet. In your financial statements, contra revenue accounts appear as deductions from gross sales to arrive at net sales. If your business makes $100,000 in gross sales, say, and has $5,000 in total contra revenues from returns, allowances, and discounts, your net sales would be reported as $95,000. To illustrate, let’s use the contra asset account Allowance for Doubtful Accounts.
It’s commonplace for businesses to encounter refund requests or returns from customers, and offering discounts is also a standard practice. The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, contra revenue account and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Now, if that sounded like a lot of mumbo-jumbo jargon to you, don’t worry. In this article, we’re going on a deep dive into what exactly a contra account is, how contra accounts work, why and how you would use contra accounts and more.
So rather than adjusting your Inventory account, you would update its contra account — Obsolete Inventory. A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts. In other words, contra accounts are used to reduce normal accounts on the balance sheet. To record a sales return, create a journal entry where you debit the Sales Returns and Allowances account and credit the Accounts Receivable or Cash account, depending on whether the original sale was made on credit or with cash. For instance, if a customer returns a product worth $200 that they bought on credit, you would debit Sales Returns and Allowances for $200 and credit Accounts Receivable for $200 to reflect the reduction in revenue due to the returned item.
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In the realm of accounting, contra revenue plays a significant role in accurately reflecting a company’s financial performance. It is a concept that may seem complex at first, but with a clear understanding, businesses can utilize contra revenue to provide a more accurate representation of their revenue streams. In this blog post, we will explore what contra revenue is, its purpose, how it affects financial statements, and how businesses can effectively use it. Sales returns involve products returned by customers, allowances are deductions due to product issues, and discounts are reduced prices for early payment or bulk purchases. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
There are two major methods of determining what should be booked into a contra account. As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss. In order to record this ongoing value drop, you would use a corresponding contra account — an Asset Depreciation account. It’s normal for businesses to receive refund requests or returns from customers. For the purpose of financial statement reporting, the amount on a contra account is subtracted from its parent account gross balance to present the net balance.