Small businesses record refunds, returns, discounts offered against defective goods, and products or service discounts in a contra revenue account. Contra means opposite or against. A contra revenue account is used to reduce the value of a related account. Your contra revenue account tells you the difference between your gross revenue and net revenue and the reason for the difference.
Some Examples of Contra Revenue Accounts
Contra accounts always appear linked to other accounts. For example, your Accounts Receivable may have a contra account titled Allowance for Doubtful Accounts.
The natural balance of a contra account is the opposite of the related account. Accounts receivable has a debit balance. So, your allowance for doubtful accounts will have a credit balance.
Another example of a contra account is accumulated depreciation. The account is used to record the amount of depreciation on a fixed asset such as a building, machinery, or land. Also, a contra asset account has a credit balance.
You can set up an allowance for doubtful accounts if you’re sure some accounts will be uncollectible. Therefore, an allowance for doubtful accounts helps maintain accurate books, preventing unexpected losses.
The Importance of Contra Revenue Accounts
Contra accounts improve transparency in financial reporting. Your contra accounts tell how your business practices affect your revenue and bottom-line. Therefore, a book-keeper can help you understand how one or more contra accounts can improve the accuracy of your financial statement. They will also show you how to generate clear and useful reports using your accounting software.
There are three common contra revenue accounts-Sales Return contra revenue account, Sales Allowances contra revenue account, and Sales Discount contra revenue account.
➢ Sales Return contra revenue account– This demonstrates the impact of returns and refunds on net revenue. Your Sales Return contra revenue account communicates important information regarding your business processes.
➢ Sales Allowance contra revenue account– This contains details regarding defective products that are sold to customers at a discounted price. When maintained correctly, Sales Allowance contra revenue account can help dig up important information regarding the business’s manufacturing and packaging processes.
➢ Sales Discount contra revenue account– This is used to record cash, trade, quantity, and seasonal discounts offered to customers for marketing purposes or to clear old stock. Your Sales Discount contra revenue account contains important information that you can utilize to assess your discount policy and understand the effect of seasonal discounts on overall sales.
Is Unearned Revenue a Contra Asset Account?
No. Unearned revenue is the money received by a business for a product or service that has yet to be delivered or provided and is treated as a current liability, not an asset.
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