What is a contra revenue account?

The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received. When the original dollar amount is kept in the original account and a separate account is used for recording the deduction, the resulting financial information becomes more transparent and helpful for stakeholders. For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately.

Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. 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.

What Are the Different Types of Contra Accounts?

These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents a negative amount. When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company. In case a customer returns a product, the company will record the financial activity under the sales return account. In this example, the contra revenue accounts (Sales Returns and Allowances and Sales Discounts) are used to provide a more accurate and detailed representation of the company’s revenue position.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity.

IFRS Accounting Standards

If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining. A contra asset account is not classified as an asset, since it does not represent long-term value, nor is it classified as a liability, since it does not represent a future obligation.

To report the real value of the financial statement, you will need to record the amount you can reasonably estimate that will probably effect the financial statement classification. Please contact your sales or bookkeeping for startups account representative to find out how to get the Full Multi-Book Accounting feature. The assistance of NetSuite Professional Services or a Multi-Book authorized partner is required to implement this feature.

Definition Of a Contra Account?

Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance. Recording sales returns and allowances in a separate contra‐revenue account allows management to monitor returns and allowances as a percentage of overall sales. High return levels may indicate the presence of serious but correctable problems. The first step in identifying such problems is to carefully monitor sales returns and allowances in a separate, contra‐revenue account. 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.

For example, Sales returns and allowances is a contra-revenue account, in which sales returns and allowances are separately accounted for in order to have a separate data for such items. The name “contra revenue” comes from the fact that channel marketing programs such as rebates, sales promotion incentive funds (SPIFs), co-ops and non-discretionary market development funds (MDF) are logged by the brand owner as a debit. These types of channel programs are directly tied to the units sold and revenue captured by channel customers.

Examples of contra accounts include allowance for doubtful accounts, reserve for obsolete inventory, and accrued liabilities. Each of these accounts helps to offset another account on the balance sheet. For instance, the allowance for doubtful accounts reduces the net amount of accounts https://marketresearchtelecast.com/financial-planning-for-startups-how-accounting-services-can-help-new-ventures/292538/ receivable, while the reserve for obsolete inventory does the same for inventory. Similarly, accrued liabilities reduce the total amount of current liabilities. Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances.