What Is a Contra Account & Why Is It Important? Accounting Services

The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. In the above journal entry, sales returns are the contra-revenue 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.

The portion of the account receivable that is estimated to be not collectible is set aside in a contra-asset account called Allowance for doubtful accounts. At the end of each accounting cycle, adjusting entries are made to charge uncollectible receivable as expense. The actual amount of uncollectible receivable https://business-accounting.net/ is written off as an expense from Allowance for doubtful accounts. 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.

1. Contra revenue accounts reduce revenue accounts and have a debit balance.
2. Since you no longer have the shoes, aka the asset, you record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10.
3. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss.
4. The main advantage of using separate contra revenue accounts is that each one provides targeted information about the individual deductions taken from sales.
5. Contra liabilities, such as discounts on notes or bonds payable, decrease the balance of a liability.

And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business. Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. A contra account contra revenue account is a negative account that is netted from the balance of another account on the balance sheet. The two most common contra accounts are the allowance for doubtful accounts/bad debt reserve, which is subtracted from accounts receivable, and accumulated depreciation, which is subtracted from fixed assets.

There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation. 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.

The contra revenue account in this journal entry is usually sales returns and allowances, etc. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. The equity section of the balance sheet is where the shareholder’s claims to assets are reported.

Wave Accounting ReviewWave Accounting Review

Allowance for doubtful accounts offsets a company’s accounts receivable account. For a clearer understanding of contra revenue account sales allowances and returns, I’m going to explain it by using an illustration. Let us assume that Zawarudo Company sells $100,000 worth of commodities on credit.

Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement. For example, accumulated depreciation is a contra asset that reduces the value of a company’s fixed assets, resulting in net assets. A normal asset has a debit balance, while a contra asset sits against this to show the net balance of both assets on your financial statement. Contra accounts allow you to show the amounts that offset a paired related account. As a small business owner, understanding how to set up contra accounts enables you to prepare and maintain accurate financial records.

This general structure can be applied across all contra types, so if the parent account has a credit, the contra account will have a debit. Similarly, if the parent account lists entries as debits, the contra account will appear as a credit. A contra account provides missing context by pairing it with a related account. So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes.

Contra revenue

The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a product to the company for a refund. 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.

Financial Accounting Meaning in Accounting, Types, and Examples

Because there is an inherent risk that clients might default on payment, accounts receivable have to be recorded at net realizable value. In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet. Expenses are the costs of doing business, but not all costs are expenses. In accounting terms, an expense is a cost incurred to produce revenue reported on the income statement.

Contra revenue accounts help companies report an accurate income figure on the income statement. The accounting treatment for contra revenue is similar to other contra accounts. In this case, contra revenue reduces or modifies the value of the sales figure that appears on the income statement. The following are examples of commonly-used contra asset accounts you could create to better understand your business financials.

A contra revenue account plays a crucial role in accounting, providing valuable insight and transparency into financial records. In this article, I will explore the definition of a contra revenue account and provide real-world examples to help you better understand its significance. Accounting terminology can be baffling at the best of times, but when you are busy running a business, your focus is on business growth and providing a high standard of product / services. Taking the time to decipher your financial statements can be burdensome and tiring.