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Contra Revenue: Simplifying Returns, Discounts, And Allowances

contra revenue account list

Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean. An important function of contra accounts is to preserve the historical value in the main account while presenting a reduction in the net value. By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset. The revenue that your business is expecting and is not earned would not be considered a contra account. For instance, if your business has taken an annual membership fee in advance from its customers for the first month but the remaining revenue of the eleven months is not earned. This type of revenue would be classified as a current liability and need to be recorded on the credit side of the balance sheet.

This account prevents your business from unpredictable losses and keeps your bookkeeping records accurate. It also allows you to gauge the impact of your business activities on the net revenue and total profit. The purpose of the Sales Returns account is to track the reduction in the value of the revenue while preserving the original amount of sales revenue. ABC Computers makes sales of 90,000; unfortunately, due to a fault in a product, they received returns of 2,500. The sales will still show a sales credit on the profit and loss of 90,000, but there is also a contra returns account with a debit of 2,500.

Contra Liability Account

This type of account could be called the allowance for doubtful accounts or a bad debt reserve. The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible. The amount is reported on the balance sheet in the asset section immediately below accounts receivable. The net of these two figures is typically reported on a third line. Overall, while maintaining contra accounts may require additional effort, the benefits they offer in terms of financial transparency and accountability make them an essential tool in accounting.

Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are noted below. By reporting contra asset accounts on the balance sheet, users of financial statements can learn more about the assets of a company. Contra asset accounts allow users to see how much of an asset was written off, its remaining useful life, and the value of the asset. As mentioned, businesses use contra revenue accounts to understand net vs. gross revenue. The transactions are sometimes recorded in one or more accounts, but the balance is usually a debit.

Why are Contra Accounts Inportant?

In short, in the example above it is distinguishable that the drawing account is reducing the balance of the equity account. When the company http://www.rballen.com/contact-us/ pays the cost of having the flyer printed, a journal entry is done. Suppose your startup sells $50,000 worth of products on credit.

  • Contra equity accounts are typically used for a company to buy back its stock or shares.
  • The accumulated depreciation account has a credit balance and is used to reduce the carrying value of the equipment.
  • So you have got the idea of contra revenue accounts and their utility.
  • The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
  • A key example of contra liabilities includes discounts on notes or bonds payable.

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative http://www.kinospace.ru/movie/391630 example above (i.e. the account decreases the carrying value of A/R). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

Cash Flow Statement

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s https://www.shanafoods.com/author/admin/page/6/ balance and the contra account asset balance is the book value. Contra liability, equity, and revenue accounts have natural debit balances.

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