Look at contra revenue management as a key part of your broader financial strategy. Focusing on these areas can help your business not only survive, but thrive, in today’s competitive market. Speaking of which, make sure you keep an eye on your competitors and industry best practices.
Sales Allowances
- Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account.
- The company would see the original amount, discounted sale, and net sales in the contra revenue account.
- Contra account is important as it not only allows a company to report the original amount of a transaction but also report any reductions that may have happened so that the net amount will also be reported.
- Conversely, for a contra asset account like depreciation, you would list all entries as a credit, carrying a negative total balance for the overall account.
- This helps the firms to evaluate the book value of their assets and liabilities.
- 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.
- Please continue reading to delve into the details of contra-revenue accounts and the appropriate entries for them.
This helps the firms to evaluate the book value of their assets and liabilities. Utilizing contra accounts in financial accounting has several significant advantages that enhance financial transparency and enable more effective financial management. When considering all of the money currently owed to your business that’s recorded in your Accounts Receivable (A/R) line item as an existing asset, there’s a good chance that not all of those customers are going to pay you back in full. To compensate for those potential deadbeat customers, you can use a Bad Debts account to serve as a contra for your A/R. Contra revenue affects the income statement by reducing gross sales, ultimately influencing the net sales figure.
What Is a Contra Account?
When recording assets, the difference between the asset’s account balance and the contra account balance is the book value of the asset. A revenues account with a debit balance instead of the usual credit balance. Businesses leverage contra-revenue accounts to distinguish between net and gross revenue. While transactions may be recorded in one or more arrangements, the typical balance is a debit, contrasting with the usual credit balance in a standard sales account. Calculating contra revenue involves a straightforward deduction of gross sales from net sales. For the purpose of presentation on primary financial statements, we are often concerned only with the net figure of two similar classes/balances which we determine by subtracting one account from the another.
Chart of Accounts Listing of Typical Contra Accounts:
The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold. Sometimes, it is important to keep the original balance of the accounts and create the contra accounts to be able to calculate the net value of the account. As evident from the table below, each contra account has a parent account whose normal balance is often exactly opposite of the normal balance of the relevant contra account.
Contra liability accounts
In your income statement, the gross sales are $50,000 less than the sales returns and allowances of $1000. Keep reading to learn more about contra revenue accounts and what should go in them. A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales.
In essence, contra accounts allow you to report your firm’s gross and net amounts. These accounts also ensure that you follow the matching principle in accounting, which states that you record expenses in the same period you incur them. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money.
This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. A company creates allowances for doubtful accounts to record the portion of accounts receivable which it believes it will no longer be able to collect. The amount in allowance for doubtful accounts is deducted from the accounts receivable account of a company. A contra account is also known as a valuation allowance, because it adjusts the carrying value of the account with which it is paired.
- Recording contra revenue accurately in your accounting books is crucial for maintaining reliable financial records.
- The Allowance for Doubtful Accounts is directly related to the asset account entitled Accounts Receivable.
- So as values shift depending on real-world factors, rather than making deductions or adjustments to the original or “parent” account, you would record these changes in the contra account instead.
- If you’re the one managing your company’s books of accounts, be sure to report the contra account on your financial statement on the line item directly beneath the main account.
- Accumulated Depreciation acts as a subaccount for tracking the ongoing depreciation of an asset.
Usually, the asset account is listed first, and its contra asset counterpart is listed underneath, with the asset’s net value or book value. You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). The contra asset account of your equipment account is the accumulated depreciation of equipment.
Strategies to reduce contra revenue
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. Our AI-powered tool gives you daily access to your company’s finances while our expert finance team double-checks the numbers every step of the way. Accruing tax liabilities in accounting involves recognizing and recording contra expense account taxes that a company owes but has not yet paid. 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. The Allowance for Doubtful Accounts is used to track the estimated bad debts a company my incur without impacting the balance in its related account, Accounts Receivable.
