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What is a Contra Revenue Account — Example and Definition

This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation. Financial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period . A company should have a policy not to return the goods sold and not provide sales rebates and discounts on products. Accounting For Such TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. The company should minus the sales return/allowance/discount from gross sales in the above case.

With FAQLogin.Com, we help you log in to applications in the fastest way, optimize your time and help you be more productive. Doubtful debts are those debts that a company believes will not be received in the future. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.

Types of Contra Accounts

When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line. The contra equity account reduces the total amount of shareholders’ equity. For example, accumulated depreciation is a contra-asset that reduces the value of a company’s fixed assets, resulting in net assets.

What does a contra revenue account mean?

Revenue that is deducted from a company's gross revenue. Contra revenue transactions are recorded in contra revenue accounts that typically reflect a debit instead of a credit. The most common contra revenue accounts are for sales allowances, discounts, and returns.

It is a contra revenue account having debit balance as the normal balance of revenue is credit. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find. Companies bury them in the footnotes and often don’t break out the actual calculation. Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.

Types of Contra Accounts for Revenues

A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery.

What is a Contra Revenue Account — Example and Definition

An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account.

Contra Revenue Account List

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens”publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.

For freelancers and SMEs in the UK & Ireland, Debitoor adheres to all UK & Irish invoicing and accounting requirements and is approved by UK & Irish accountants. Designed for freelancers and small business owners, Debitoor invoicing software makes it quick and easy to issue professional invoices and manage your business finances. Press F12 from contra voucher screen, and locate” use single entry mode for Pymt/Rct/Contra” option to Yes. Contra entry is the internal movement of fund which has no business effect.

Contra Account Definition

The “Accumulated Depreciation” line item is the contra asset account reflected on the balance sheet, but often they are combined as “PP&E, net”. Consider what would happen if you have sales on credit that you reasonably expect will not be paid. In the example of Homes Inc. the percentage of customers defaulting on the account, and the amount defaulted, is estimable and probable.

What is a Contra Revenue Account — Example and Definition

One common example is accumulated amortisation, which is a contra-asset account. This means that it acts in the opposite manner of a regular asset account. At the end of the month, the smaller amount in his account from one ledger is transferred to his account in the ledger with large amount. The entry passed for recording this transfer is known as set off or contra entry. For example, a company has provided services to its customer for $10,000 with a sales discount of 2%. For example, a company has determined that 5% of their accounts receivable in the amount of $15,000 will become uncollectible. The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received.

Sales discounts – Normal discounts given to the customers are recorded separately because of special circumstances. Normal discounts usually consist of a marketing strategy, when a customer purchases a large volume of product, or if a customer wants to make early payments on the product. Sales allowance – Allowances are recorded when products sell below the normal price for whatever reason. Sales allowances can occur if there is a discount on surplus inventory or a discount because of product defects. Sales Allowances-Sales allowances are also a part of the sales account. Sales allowance reduces the selling price when a customer agrees to accept a defective unit instead of returning it to the seller. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.

Contra Liability Account Definition – Investopedia

Contra Liability Account Definition.

Posted: Sun, 26 Mar 2017 04:36:36 GMT [source]

Inventory is updated with the debit entry and the cost of goods sold is reduced with the credit. Accounting is how we tell a story about an economic event or financial transaction, such as a purchase or a withdrawal of money, for example. Periodic financial statements report the impact of the story and are used by leaders of a firm or industry to analyze performance, plan, and respond. Credit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account.

The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. Note that the Balance Sheet is not affected with the result of the above entry as the cash flow is between two asset accounts. Metadata, or “data about data.” The Chart of accounts is in itself Metadata. It’s a classification scheme that enables aggregation of individual financial transactions into coherent, and hopefully informative, financial statements.

  • Contra accounts can get buried in the footnotes of financial statements, but they could be a key piece of your investigation into a growth stock’s prospects.
  • It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company’s products that are causing customers to return goods.
  • We also reference original research from other reputable publishers where appropriate.
  • The allowance for doubtful accounts is not specifically reported, but the 10 reported that the allowance is immaterial to the amount.
  • A contra account is an account with a balance opposite the normal accounts in its category.

A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. However, if the billing office stopped there, you would overstate your assets and net income. You must also report the amount that you can reasonably expect will not be paid, if it is estimable and What is a Contra Revenue Account — Example and Definition probable. You could simply adjust the parent account…but then you are missing an essential part of the story — how many patients were actually treated today for a sprain. Debit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance.

Account numbers may be structured to suit the needs of an organization, such as digit/s representing a division of the company, a department, the type of account, etc. The first digit might, for example, signify the type of account (asset, liability, etc.). In accounting software, using the account number may be a more rapid way to post to an account, and allows accounts to be presented in numeric order rather than alphabetic order. A sales allowance account is used to record all the reductions that a company allows to its customers to buy defective or damaged goods. Contra accounts can get buried in the footnotes of financial statements, but they could be a key piece of your investigation into a growth stock’s prospects. A contra account is used in order to better portray the relationship between certain debits and credits within the overall financial structure of an entity. A contra account can be used to remedy an error, to track depreciation of an asset, or to register payments that are not collectible.

What is a Contra Revenue Account — Example and Definition

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