contra-revenue account

Therefore, the sales return account is known as a contra revenue account because it decreases the value of assets. A contra account is an account created for clarification about any adjustments made to an existing item in ledger accounts. For recording the depreciation of fixed assets of a company, a separate account is created. Note that in accounting, the term “book value” is also used interchangeably with net value. The most common type of contra account is the contra-asset account. This type is paired with the asset account, which allows a business to record the original price or value of the asset at time of purchase.

  • In order to balance the journal entry, a debit will be made to the bad debt expense for $4,000.
  • If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return.
  • To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit.
  • As mentioned, businesses use contra revenue accounts to understand net vs. gross revenue.
  • The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of.
  • For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.

The customer returns you back those two typewriters worth $20,000. So, now you need to do a journal entry of sales returns in which you will reduce your sales. As mentioned, CA accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. This means that accounts receivables have a debit balance of $10,000, and the firm credits revenue for $10,000. A customer returned $100 worth of items, claiming them to be defective.

Types of Contra Account

Keep reading to learn more about contra revenue accounts and what should go in them. However, that $1.4 billion is used to reduce the balance of gross accounts receivable. Therefore, contra accounts, though they represent a positive amount, are used to net reduce a gross amount. For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. Contra accounts are used to reduce the value of the original account directly to keep financial accounting records clean.

contra-revenue account

This is another non-operating revenue because it is not a day-to-day activity and is not the main operation of your business. Here is an example of a journal entry you would create when you make a sale (using accrual accounting). Revenue, or sales, is the income your business receives from business-related activities. For most businesses, the majority of its revenue is derived from sales. The increase in the revenue is credit while the decrease is recorded as debit.

Contra Revenue Sales Discount Illustration

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 accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently. That is because some of the bonds are issued at a discount, so this reduces the balance of their bonds payable.

A contra account is used to record adjustments and transactions that have an opposing impact to report the true value of a firm’s financial statements. Contra accounts are commonly found on general ledgers where all of a business’s accounts and transactions are organized on a master list. The contra account is used to report the correct assets while preserving the transactions and balance of the relating account. The most common contra assets are accumulated depreciation and the allowance for doubtful accounts.

What Happens to the Balance Sheet When Accounts Receivable Is Collected?

The contra return on sales account will be debited while the normal cash account will be credited. There is a hybrid version of these account types called contra accounts. The normal balance of a contra account is intentionally the opposite of the normal balance for a particular account classification. For example, a contra asset account has a credit balance instead of the normal debit balance for an asset account.

What are the two contra revenue accounts?

Two examples of contra revenue accounts are: Sales Returns and Allowances. Sales Discounts.

If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500. Let’s have a deeper understanding of the contra asset vs contra revenue with the help of examples. First of all, we know that when an asset increases it is debited, and when decreases it is credited. So, the accumulated depreciation account which is a contra asset account has a negative balance and it reduces the balance of the asset account.


When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value. There are two major methods of determining what should be booked into a contra account. 507XXX Other RevenuesThis major source of revenue account includes financial resources generated by the institution and which are not specifically identified elsewhere in the CHART OF ACCOUNTS. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.

The debit balance of the asset account and the credit balance of the contra asset account determine the net value of the asset. A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet. Examples of contra liabilities are Discounts on Bonds and Notes Payable and Short-Term Portion of Long-Term Debt. Other contra account examples can be Allowance for Doubtful Accounts (also contra asset account), Bond discounts, which represent contra liability account, i.e. decrease bond payable account. As asset accounts have debit balances, contra asset account will have credit balance. This is done in order to separate data in these accounts for the analysis and presentation purposes.