Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are increased with a credit entry.
Examples of Contra Revenue Accounts
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 contra revenue account is a reduction from gross revenue, which results in net revenue.
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This account is not classified as an asset since it does not represent a long-term value. It is not classified as a liability since it does not constitute a future obligation. A contra account is an essential concept in financial accounting that serves to offset the balance of another account.
How to Record a Contra Account
An allowance granted to a customer who had purchased merchandise with a pricing error or other problem not involving the return of goods. If the customer purchased on credit, a sales allowance will involve a debit to Sales Allowances and a credit to Accounts Receivable. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
- It represents the amount of sales that are expected to be returned or refunded to customers.
- Salaries Expense will usually be an operating expense (as opposed to a nonoperating expense).
- An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account.
- The amount is reported on the balance sheet in the asset section immediately below accounts receivable.
It will debit Accounts Receivable for $100,000 and credit to Sales for $100,000. A contra expense account is an account used to reduce the amount of an expense without changing the balance in the main expense account. Examples of contra expense accounts include Purchase Returns, Purchase Discounts, and Advertising Reimbursements.
Define Contra Revenue Account
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. One common example of a contra account is the allowance for doubtful accounts. This account is used to reduce the balance of accounts receivable to reflect the amount that is unlikely to be collected.
He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium the usual balance in a contra-revenue account is a: sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
This can be particularly useful for investors and other stakeholders who are interested in understanding the true financial health of a company. On the income statement, a contra account is typically used to reduce the gross revenue or gross sales of a company. For example, a sales returns and allowances account is used to offset the value of goods that were returned or discounted by customers. Contra asset accounts are used to offset the balance in an asset account.
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