What is a contra revenue account?

What is a contra revenue account?

Balance Sheet vs. Profit and Loss Statement: What’s the Difference?

If you sell both hardware and software, and your software discounts are higher, you should consider it an attractive contra improvement opportunity. Sales Returns – If the company sells the goods and it returns due to some reasons such as defected goods or if they are not as per customer requirement. sales return decreases the sales and debtors if sales made on credit. 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.

That’s because, as far as accounting is concerned, you haven’t really «spent» $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Now you sell the shoes for $30.

Accumulated deprecation represents the cumulative amount of depreciation expense https://www.bookstime.com/ charged against an asset. Accumulated deprecation reduces the value of an asset.

Unearned revenue is not a contra asset because the business has no ownership claim to the sum that it represents. Make sure that you report contra accounts on the same financial statement as the related https://www.bookstime.com/articles/contra-revenue-account accounts. If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account.

Let’s review another example. Smith’s factory store’s credit card sales were $4,500 on December 15. The credit card company charges a 2.5% service fee.

I don’t see any information regarding modifying or adding “account types” which is needed to add the contra accounts. In Account Type list I see we have Accumulated Depreciation and Depreciation options for setting up a contra-asset account but I see no options for what is a contra account & expenses. «Contra» accounts are ones which reduce the balance of and are always ‘paired’ with a related account. Taking contra revenue to the extreme, where exactly do your prices come from?

• Companies use a contra account, instead of debiting Sales Revenue, to disclose the amount of sales returns, allowances, and discounts in the general ledger and the income statement.
• A contra account is an account used in a general ledger to reduce the value of a related account.
• Under accrual basis, revenue is recognized only when it is earned and realizable.
• Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).
• Transactions made to contra accounts are presented on a company’s financial statements under the related account.
• Generally, contra revenue accounts have a debit balance.

For example, when a line item on your balance sheet presents the balance of accounts receivable, report the value of allowance of uncollectible accounts below the accounts receivable line. Be sure to enter the contra account on the opposite column of the account they’re offsetting. If contra assets appear in the credit column, record contra liabilities on side.

A contra account offsets the balance of a corresponding account. 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.

Almost all accounting is done on either a cash basis or an accrual basis. Cash basis accounting means that costs and revenues are recorded on the accounts when cash is either paid out or received for those transactions.

Illustrating Contra Accounts

The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances.

You will earn the unearned revenue when you deliver the products or services later. The business will repay this cash received from the customer if it fails to fulfill its obligation before the customer. Thus, Unearned Revenue is not a contra account to Revenue because it is just a current or long-term liability a business can have. So, you will not debit the Sales Revenue account when someone returns something, and you always credit Sales Revenue.

To calculate the Net income, the seller would subtract the Sales Returns and Allowances amount from the Gross income. Remember, contra accounts never exist on their own, and we always link them to another account. For example, Allowance for Bad Debt is a contra account to Accounts Receivable. Since the Accounts Receivable has a normal debit balance, the Allowance for Bad Debt will have a normal credit balance.