A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account. The contra asset account Accumulated Depreciation is deducted from the related Capital Assets to present the net balance on the parent account in a company’s balance sheet. Sales Returns contra revenue account records the value of a sales deduction attributable to goods returned by buyers in exchange for a refund. For example, if your business has accounts receivable of $50,000 and an allowance for doubtful debts account totalling $5,000, the net accounts receivable is $45,000.
Examples of Contra Revenue Accounts
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. A contra revenue account that reports 1) merchandise returned by a customer, and 2) the allowances granted to a customer because the seller shipped improper or defective merchandise. This of course will reduce the seller’s accounts receivable and is subtracted from sales (along with sales discounts) to arrive at net sales. This line item is the aggregation of two general ledger accounts, which are the sales returns account and the sales allowances account. Both of these accounts are contra accounts, which means that they offset gross sales. The natural balance in these accounts is a debit, which is the reverse of the natural credit balance in the gross sales account.
Sales Discounts
- Yes, the cost is now $200 lower than it was previously recorded because of the allowance provided by Whistling Flutes.
- In your income statement, the gross sales are $50,000 less than the sales returns and allowances of $1000.
- On 5th Feb 2020, the customer returned 5 pieces of product Y and 6 pieces of product Z to ABC cosmetics.
- However, to improve the bookkeeping process, returns and allowances are often recorded in a separate account entitled sales returns and allowances.
- A return occurs when a buyer returns part or all of the merchandise they purchased back to the seller.
The reason you show a contra asset on a balance sheet is so you can see the overall net balance of a particular asset and to give investors a more accurate look into your company’s financial activity. Overshooting in sales is caused due to overstating of sales returns and allowances. Once sales are made, not only sale revenue and account receivable are affected by this transaction.
Trial Balance
Our AI-powered tool gives you daily access to your company’s finances while our expert finance team double-checks the numbers every step of the way. When preparing an income statement, the amount in the sales return allowance is deducted from the total sales to calculate the company’s actual sales/net sales. It depends on whether the sale of those goods that were returned were cash sales or credit sales. When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account.
One of the most common reasons for product returns is when customers find that the item they are receiving does not match the product description. In other words, contra revenue is a deduction from gross revenue, which results in net revenue. To indicate that dual posting is necessary, a diagonal line is drawn in the P.R.
- Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.
- The other account that will be affected the same amount as finished goods is the cost of goods sold.
- The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation.
- Sales returns and allowances is a deduction from sales that shows the sale price of goods returned by customers, as well as discounts taken by them to retain defective goods.
- The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable.
Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. The other account that contra expense account will be affected the same amount as finished goods is the cost of goods sold. On 5th Feb 2020, the customer returned 5 pieces of product Y and 6 pieces of product Z to ABC cosmetics. So once this entry is posted, inventory will be increased, and the cost of goods sold will be derecognized.
What is a contra asset account?
What is a Contra Revenue Account?
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