contra revenues account definition and meaning

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. 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. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services.

Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit. Debit BalanceIn a General Ledger, when the total credit entries are less than the total contra revenues account definition and meaning number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.

Attributes of accounting elements per real, personal, and nominal accounts

The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment. The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. The two common contra liability accounts, discount on bonds payable and discount on notes payable, carry normal debit balances. The discount on bonds payable represents the difference between the amount of cash a company receives when issuing a bond and the value of the bond at maturity. Notes payable represents a liability created when a company signs a written agreement to borrow a specific amount of money. The lender may offer the company a discount if it repays the note early.

All accounts also can be debited or credited depending on what transaction has taken place. For example, when a vehicle is purchased using cash, the asset account «Vehicles» is debited and simultaneously the asset account «Bank or Cash» is credited due to the payment for the vehicle using cash. Some balance sheet items have corresponding «contra» accounts, with negative balances, that offset them. Examples are accumulated depreciation against equipment, and allowance for bad debts against accounts receivable.

Depreciation Expense Account Vs. Allowance for a Depreciation Account

United States GAAP utilizes the term contra for specific accounts only and does not recognize the second half of a transaction as a contra, thus the term is restricted to accounts that are related. For example, sales returns and allowance and sales discounts are contra revenues with respect to sales, as the balance of each contra is the opposite of sales . To understand the actual value of sales, one must net the contras against sales, which gives rise to the term net sales . 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 liabilities reduce liability accounts and carry a debit balance.

contra revenues account definition and meaning

Sales return occurs when there is actual return of a defective item. Sales allowance happens when the customer is willing to keep the item with a reduction in its selling price. Invoice for goods or service provided and payment not received to record accounts receivable and revenue earned.

Types of revenue accounts

It carries a credit balance and is linked to the fixed asset account, which carries a debit balance. The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period.

What are some contra asset accounts?

  • Accumulated depreciation.
  • Accumulated depletion.
  • Obsolete inventory reserves.
  • Allowance for doubtful accounts.
  • Trade accounts receivable.
  • Discount on notes receivable.

When reporting a contra account in a company’s financial statement, it is reported immediately below the account it relates to or corresponds. Contra accounts have different names depending on the account they correspond. For instance, a contra account that relates to an accounts receivable is called a contra asset account. Discount on notes receivable refers to a contra asset account that occurs when the current value of a note receivable amounts to https://accounting-services.net/ less than the face value of the note. The resulting credit balances in these types of accounts may typically be amortized as interest revenue over the course of the note’s viable lifetime. However, you will need to debit contra revenue accounts because they are the opposite of revenue accounts. Contra Asset Account – A contra asset account is an asset that carries a credit balance and is used to decrease the balance of another asset on the balance.

Contra Equity Account

If no reserve account, the entry is to write-off directly to bad debts, debit bad debt expense/credit accounts receivable. In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses.

  • These contras reduce the equity account and carry a debit balance.
  • If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return.
  • In accounting terms, an expense is a cost incurred to produce revenue reported on the income statement.
  • RECORD the revenue and account receivable in the general ledger by journal entry, debiting the appropriate accounts receivable account and crediting the appropriate revenue account.
  • If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account.

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