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For example, an accounts receivable’s contra account is a contra asset account. This type of account can also be called the bad debt reserve or allowance for doubtful accounts. As mentioned, contra asset accounts usually have a negative value which is the same as a credit balance. That is to completely or partially offset the balance of their related asset accounts.
For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. 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. The sales returns account contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods. A return can be defined as the concept of a buyer in a business or organization returning a defective product to the seller or supplier to receive a full or partial refund. A contra account is where we record events that are contrary to a general ledger parent account, also called a relating account.
Contra Revenue Sales Returns Illustration
Allowance for doubtful accounts is contra asset accounts that offset the accounts receivable. They are used in case some customers won’t be able to pay the money they owe to the business. As mentioned, contra asset accounts are usually listed below their matching asset accounts, and the net values of those assets are written next to the contra accounts. To oppose the revenue made by a company, contra revenue accounts must have a debit balance.
The amount is not reported, and the net sales amount is reported on the income statement. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t contra revenue be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement. If you’re valuing a low-growth company based on its equipment assets, you want to use the net value to be conservative.
What is a Contra Revenue Account?
Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances. Therefore, for these three, the debit balance actually represents https://accounting-services.net/callable-or-redeemable-bonds/ a negative amount. When a contra asset account is first recorded in a journal entry, the offset is to an expense. 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.
- Notes payable or bills payable represents a liability created when a company signs a written agreement to borrow a specific amount of money.
- Keep reading to learn more about contra revenue accounts and what should go in them.
- Accounts receivable (A/R) has a debit balance, but the allowance for doubtful accounts carries a credit
balance. - When the amount recorded in the contra revenue accounts is subtracted from the amount of gross revenue, it equals the net revenue of a company.
Purchase returns and allowances do not appear on the balance sheet as they are not liabilities. Instead, they must be recorded in a type of account known as a contra revenue account. The purchases returns and allowances account is a contra account to purchases since it reduces purchases by the number of returns and allowances. Key examples of contra asset accounts include allowance for doubtful accounts and accumulated depreciation. Accumulated depreciation reflects the reduction in value of a fixed asset.