The sales discount and sales return are Contra revenue accounts, as it decreases the sales revenue. In the example above, before returning goods by a customer sales were $50,000, after reducing $10,000 now sales revenue https://business-accounting.net/ balance is $40,000. Moreover, the natural balance of sales revenue is credit in the balance sheet. A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet.

A contra entry is recorded when the debit and credit affect the same parent account and resulting in a net zero effect to the account. These are transactions that are recorded between cash and bank accounts. To keep business operations running smoothly, you need incoming money. When you make a sale or earn money from another activity, you need to record it. That way, you can keep your accounting books updated, organized, and legal. The revenue account is only debited if goods are returned and sales are refunded. In this case, the recorded sale must be reversed because the original sale is canceled.

Is depreciation expense a contra account?

A drawing account acts as a contra account to the business owner’s equity; an entry that debits the drawing account will have an offsetting credit to the cash account in the same amount. A bond discount is an example of a contra liability account and it reduces the amount of a bond payable. The most known type of a contra asset account is the Accumulated Depreciation which reduces the amount of Fixed Assets.

If you own a landscaping company, your business’s operating revenue is derived from your services. When you record revenue in your accounting books will depend on the method of accounting you use.

What is a Contra Account?

The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company. A regular asset account typically carries a debit balance, so a contra asset account carries a credit balance. Two common contra asset accounts include contra revenue account examples allowance for doubtful accounts and accumulated depreciation. Allowance for doubtful accounts represents the percentage of accounts receivable a company believes it cannot collect. Allowance for doubtful accounts offsets a company’s accounts receivable account.

For example, Service Revenue is a type of account that records sales from services you perform. Contra liabilities are common in companies that sell bonds to raise capital. To drum up interest in the bond, the company will sell it at a discount.

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By keeping the original dollar amount intact in the original account and reducing the figure in a separate account, the financial information is more transparent for financial reporting purposes. 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. Key examples of contra accounts include accumulated deprecation and allowance for doubtful accounts. It is the principal revenue account of merchandising and manufacturing companies.Sales Discounts – a contra-revenue account that represents reduction in the amount paid by customers for early payment. Non-operating revenue is money earned from a side activity that is unrelated to your business’s day-to-day activities, like dividend income or profits from investments. Non-operating revenue is more inconsistent than operating revenue. You make sales frequently, but you might not consistently earn money from side activities.

Contra assets allow for more granular visibility on the balance sheet by maintaining historical costs and independent values rather than reducing the original account directly. The popularity of contra liability accounts is lower than that of contra asset accounts. If a company issues bonds, contra liability accounts are likely to be used.

Allowance For Doubtful Accounts

She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals. The company will have to maintain separate human resources for such accounting.

An allowance for doubtful accounts is a contra-asset account that reduces the total receivables reported to reflect only the amounts expected to be paid. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account. The sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods. It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company’s products that are causing customers to return goods. A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.