What is a contra revenue account?

Consequently the net balance of the two accounts shows the net value of the sales after discounts. To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and will credit Sales for $100,000. If a customer returns $500 of this merchandise, Company K will debit contra expense account 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. Sales returns and allowances is a contra revenue account with a normal debit balance used to record returns from and allowances to customers.

Asset Contra Account

Normal asset accounts have a debit balance, while contra asset accounts are in a credit balance. Offsetting the asset account with its respective contra asset account shows the net balance of that asset. Sales returns and allowances is a line item appearing in the income statement. This line item is presented as a subtraction from the gross sales line item, and is intended to reduce sales by the amount of product returns from customers and sales allowances granted. It is followed in the income statement by a net sales line item, which is a calculation that adds together the gross sales line item and the negative amount in the sales returns and allowances line item.

• For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.
• This entry is very similar to the entry used under perpetual inventory, but instead of Inventory we use Purchase Returns and Allowances.
• At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time.
• Contra revenue accounts reduce revenue accounts and have a debit balance.
• Most of the time in accounting, the account names describe what is going on.

Introduction to Periodic and Perpetual Inventory

• Both of these accounts are contra accounts, which means that they offset gross sales.
• Discount on Notes Receivable is a contra asset account with a credit balance that reduces the normal debit balance of its parent Notes Receivable asset account in order to present the net value of receivables on a company’s balance sheet.
• Closing entries are part of the accounting cycle, which starts with a financial transaction and ends with the preparation of financial statements.
• At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Definition of Contra Revenue Account

When merchandise is returned by a customer or an allowance is granted, a credit memorandum (also known as a credit memo) is prepared. You would debit $50,000 as Accounts Receivable and credit $50,000 as Sales. If your client returns $1000 of the products bought, you record Sales Returns and Allowances worth $1,000 as debit and credit $1000 as Accounts Receivable. When using the periodic method, the entries for allowances are the same as entries for returns because we do not track inventory under the periodic method. Contra accounts provide more detail to accounting figures and improve transparency in financial reporting.

Closing Entries, Sales, Sales Returns & Allowances in Accounting

Last, for contra revenue accounts there are sales discounts, sales allowances, or sales returns. These contra revenue accounts tend to have a debit balance and are used to calculate net sales. In a sales returns and allowances contra revenue account, you offset the balance in the sales revenue account. When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500. This indicates that out of $100,000 sales, your customers return goods valued at $500.

The Entries for Closing a Revenue Account in a Perpetual Inventory System

• The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
• To indicate that dual posting is necessary, a diagonal line is drawn in the P.R.
• Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
• In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account.
• Here is the entry to recognize inventory and derecognition of the cost of goods sold.

Why You Can Trust Finance Strategists

Would you prefer to work with a financial professional remotely or in-person?

• Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales.
• A detailed record of the larger sales returns and allowances transactions should be routinely prepared and forwarded to the senior management team, so that they can gain an understanding of the reasons why these deductions are occurring.
• The sale return account is created for recording the sale that is returning from the customer.
• Sales Returns contra revenue account records the value of a sales deduction attributable to goods returned by buyers in exchange for a refund.
• Account receivable or cash and cash equivalents should also affect whether it is the cash sale or credit sales.