Sales Returns and Allowances Definition and Explanation

A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. A contra account is a general ledger account that offsets the balance of a corresponding account with which it’s paired.

Bookkeeping

Proper organization of internal document flow in the company, which must be established by order of its head, is of great importance for eliminating shortcomings in accounting. Schedule regular reviews of your allowance and discount policies so they remain competitive and relevant to your market conditions. This might mean adjusting your strategies based on seasonal trends, customer feedback, or new market entrants. They happen when you reduce the selling price of an item, typically due to minor defects or because a customer negotiated a lower price after the sale. Examples of deferred unearned revenue include prepaid subscriptions, rent, insurance or professional service fees.

Time Value of Money

If every single buyer had taken advantage of the early payment discount, the company would have provided roughly $10 thousand in discounts during that same timeframe. In reality, the actual number of company discounts came closer to $5 thousand. A contra account provides missing context by pairing it with a related account. So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead. By viewing these accounts — the parent and contra — in tandem, business owners can gain broader insights, preserve the historical figures stored in the parent account, and make accommodations for any relevant changes. A contra revenue account needs while the bookkeeper is preparing some important statements about finances.

How to Calculate Units of Activity or Units of Production Depreciation

Sales returns involve products returned by customers, allowances are deductions due to product issues, and discounts are reduced prices for early payment or bulk purchases. This type of account could be called the allowance for doubtful accounts or a bad debt reserve. If this is part of your business model, you’ll want to record every refund, return or discount in your contra revenue account to help you better understand the differences between your gross revenue and the net revenue. Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue.

Do Contra Accounts Have Debit or Credit Balances?

It is really useful to work with this account because it contains information about the sales value of products that were returned by the buyer. The main advantage of using separate contra revenue accounts is that each one provides targeted information about the individual deductions taken from sales. Since each of these deductions directly reduces your profits, it makes sense to research them in detail, to see if there are any actions that can be taken to reduce the number of deductions. For example, this analysis might indicate that your business has product quality problems or servicing issues that can be corrected.

Types of Contra Accounts

An example of a contra equity account may be ‘Owner Drawings’ which will show the funds withdrawn by the business owner in opposition to the equity account that displays the credit balance of shareholders’ equity. If you are a small business owner and you sell a product, you likely have instances of returns/refunds on items or you may provide reductions for items that are defective or damaged. If you provide either a product or a service, https://www.adprun.net/ you may also offer discounts from time to time, whether it be a sale or by personal choice to discount a client’s service fee. In these instances, it’s useful to record these situations in a contra revenue account. Accumulated depreciation offsets a company’s real property assets, such as buildings, equipment and machinery. Accumulated deprecation represents the cumulative amount of depreciation expense charged against an asset.

Doubtful Debts and Contra Assets

Keep reading to learn more about contra revenue accounts and what should go in them. Accounting terminology can be baffling at the best of times, but when you are busy running a business, revenue and cash budgets your focus is on business growth and providing a high standard of product / services. Taking the time to decipher your financial statements can be burdensome and tiring.

The balance sheet would report equipment at its historical cost and then subtract the accumulated depreciation. 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. Contra liability, equity, and revenue accounts have natural debit balances. 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.

Mismanagement of contra-revenue accounts can lead to inaccuracies in financial reporting and affect a company’s profitability. It’s crucial to have accurate records to make informed business decisions. Contra revenue affects the income statement by reducing gross sales, ultimately influencing the net sales figure.

Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing. Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings. Wanting to spruce up its aging inventory, Show-Fleur purchased new, climate controlled-seats for its fleet, delivering increased comfort for passengers and a cleaner, more modern look for vehicle interiors. The initial cost of this upgrade was $8 thousand per limo or $600,000 in total. When researching companies, the financial statement is a great place to start.

1. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance).
2. Be sure to enter the contra account on the opposite column of the account they’re offsetting.
3. Another common contra liability account is a Discount on Bonds Payable account used by businesses that issue their own bonds.

When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full. To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R. Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock. The difference between an asset’s account balance and the contra account balance is known as the book value.

Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset. Each year of an asset’s life, another year of Depreciation Expense is recorded. The offset to the Depreciation Expense account is Accumulated Depreciation. As your business acquires new assets (e.g., machinery, office equipment, vehicles), you record the initial purchase value in your Fixed Asset account. But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss.

Consider an asset account, where the values are listed as debits, and the account itself will present a positive total. Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account. A contra revenue represents any deductions or offsets that need to be removed from gross revenue to provide a clearer understanding of actual income  —  such as in the example just provided.