Types of Revenue Accounts Revenue examples in Business

The balance in a contra asset account allows the accountant, tax preparer, or other end-user to know how much to subtract from the paired asset’s value. Sales Discounts is a contra revenue account that records the value of price reductions granted to buyers in order to incentivize early payments. Examples include Net D cash discounts like 2/30 Net 60, where a full invoice payment is due in 60 days but a buyer will receive a 2% discount in case of an early settlement within 30 days. Another type of contra account is known as “contra revenue,” which is used to adjust gross revenue to calculate net revenue, i.e. the “final” revenue figure listed on the income statement.

Looking at each separately tells the reader 1) what is the normal cost for materials, and 2) how much money is saved by paying for the purchases before the required date. Here the performance measured is the ability to process the paperwork and having capital available to take advantage of discounts. While it is acceptable to record and report discounts, returns and allowances within the sales revenue account–especially for very small businesses–doing so leads to the loss of valuable information and insights. The revenue contra accounts Sales Returns, Discounts and Allowances are subtracted from the main Sales Revenue account to present the net balance on a company’s income statement. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.

Contra revenue definition

For example, a building is acquired for $20,000, that $20,000 is recorded on the general ledger while the depreciation of the building is recorded separately. A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. For example, a company has provided services to its customer for $10,000 with a sales discount of 2%.

Combining the value of the allowance for doubtful account and the accounts receivable balance gives a company the net amount of cash it can expect to receive from goods it has sold or services it has already provided. Contra revenue accounts deduct money from your business’s sales revenue. So, you need to debit these accounts and credit the corresponding account, like Accounts Receivables.

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. An estimate of bad debts is made to ensure the balance in the Accounts Receivable account represents the real value of the account. Allowance for Doubtful Accounts pairs with the Bad Debts Expense account when doing adjusting journal entries.

Understanding Contra Accounts

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. Contra accounts are used to help a company report the original amount of a transaction as well as reductions that may have happened. They serve an invaluable function in financial reporting that enhances transparency in accounting books. Contra accounts are shown in the financial statements below the paired accounts, although sometimes the balances of the two accounts are merged to a net amount for presentation purposes.

This is done in order to separate data in these accounts for the analysis and presentation purposes. Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance. Contra equity reduces the total number of outstanding shares on the balance sheet. The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock. Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue. If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item.

Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales. For both contra asset accounts, the entry is a debit to an expense and the credit is to the contra asset account. As you saw in the example, contra accounts can be an important part of your financial statement analysis, but they are hard to find.

High return levels may indicate the presence of serious but correctable problems. The first step in identifying such problems is to carefully monitor sales returns and allowances in a separate, contra‐revenue account. There are common accounting terms like assets, liabilities, and equity that individuals and small business owners quickly become familiar with, and some like debits, receivables, and contra assets that require more research.

Example Contra Account – Allowance for Doubtful Accounts

Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Contra Liability Account – A contra liability account is a liability that carries a debit balance and decreases other liabilities on the balance sheet. The equity section of the balance sheet is where the shareholder’s claims to assets are reported. The main contra equity account is treasury stock, which is the balance of all stock repurchased by the company.

• 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.
• The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
• A contra liability is an account in which activity is recorded as a debit balance is used to decrease the balance of a liability.
• Contra liability accounts such as discount on bonds payable and discount on notes payable usually carry debit balances.
• Contra revenue carries a debit balance and may be listed as sales discounts, sales returns, or sales allowances.

The sales discounts account contains the amount of sales discounts given to customers, which is usually a discount given in exchange for early payments by them. Bills payable or notes payable is a liability that is created when a company borrows any specific amount of money. If the company repays the loan early, the lender may provide a discount. This discount is subtracted from the total amount borrowed to better reflect the discount given by the lender. For example, a company has determined that 5% of their accounts receivable in the amount of $15,000 will become uncollectible. For accounting purposes and convenience of taxation, firms show the historical cost of accounts instead of directly showing the net value.

Chart of Accounts Listing of Typical Contra Accounts:

Contra Accounts help show the net value of an account in the financial statements. The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. This exceptional return on capital investment demonstrates unequivocally how the principles of value investing simply outperform all other forms of investing. Only sheer coincidence with one’s picks, referred to as ‘luck’, can beat value investing. If your business owns stocks in other companies, you will receive dividend payments. This is another non-operating revenue because it is not a day-to-day activity and is not the main operation of your business.

For this reason, contra accounts are primarily seen as having negative balances because they are used to reduce the balance of another account. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone where does the cost of goods sold go on the income statement viewing the financial information to find the historical cost of the asset. The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value.

These accounts have to be closed at the end of the accounts period in the same way as the main Income Statement accounts are being closed. Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. When a corporation buys back its shares that have been previously issued, it is recorded as a Treasury Stock.

When a company repurchases shares, it increases the fractional ownership of all remaining shareholders. Other contra account examples can be Allowance for Doubtful Accounts (also contra asset account), Bond discounts, which represent contra liability account, i.e. decrease bond payable account. Contra accounts appear on the same financial statement as the related account.

Understanding a Contra Account

This type of account could be called the allowance for doubtful accounts or bad debt reserve. 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 net of these two figures is typically reported on a third line. 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.

For accrual accounting, you need to credit one account and debit another. If an account is increased by one account, it is decreased by the other. Revenue, or sales, is the income your business receives from business-related activities. For most businesses, the majority of its revenue is derived from sales. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups. Get instant access to video lessons taught by experienced investment bankers.

Contra liabilities reduce liability accounts and carry a debit balance. Contra equity accounts carry a debit balance reduce equity accounts. Contra revenue accounts reduce revenue accounts and have a debit balance.

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 delivery van is purchased by a business to use in delivering product and picking up materials.