What is a contra revenue account?

They serve an invaluable function in financial reporting that enhances transparency in accounting books. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Contra LiabilityFinancing fees in M&A are an example of a contra liability, as the fees are amortized over the debt’s maturity – which in turn reduces the tax burden until the end of the term. If you have buildings or equipment that you rent out on the side, you need to make a Rent Revenue account. For accrual accounting, you need to credit one account and debit another. If an account is increased by one account, it is decreased by the other.

Types of Contra Account

Although sales returns and sales allowances are technically two distinct types of transactions, they are generally recorded in the same account. Sales returns occur when customers return defective, damaged, or otherwise undesirable products to the seller. Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price. Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount. Contra accounts exist when the account reported on the balance sheet needs to be reduced by a different account to show its true value.

• Purchase returns are debited to the Purchase Returns and Allowances account.
• The difference between an asset’s account balance and the contra account balance is known as the book value.
• The impact to the income statement includes the original sale, the contra account for returns, and the debit to expenses for estimated uncollectible based on net receivable.
• They are used in case some customers won’t be able to pay the money they owe to the business.
• Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.

A liability that is recorded as a debit balance is used to decrease the balance of a liability. Revenue is an income statement account, but it flows through to the equity section of retained earnings as well. Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. That is contract revenue accounts will have a debit balance which is contrary to having a credit balance for revenue accounts. The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue.

What Is the Difference Between Net Revenue, Net Sales, Cost of Sales & Gross Margin?

Examples are accumulated depreciation against equipment, and allowance for bad debts against accounts receivable. 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 .

When one institution borrows from another for a period of time, the ledger of the borrowing institution categorises the argument under liability accounts. Debit cards and credit cards are creative terms used by the banking industry to market and identify each card. From the cardholder’s point of view, a credit card account normally contains a credit balance, a debit card account normally contains a debit balance. The sales allowance shows the discounts given to customers when returning the product. This is done to entice customers to keep products instead of returning them.

List of Contra Accounts with Examples

Conversely, a decrease to any of those accounts is a credit or right side entry. On the other hand, increases in revenue, https://www.wave-accounting.net/ liability or equity accounts are credits or right side entries, and decreases are left side entries or debits.