Types of contra accounts
Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account). Enter the type of contra account when prompted and give it a name such as “”Allowance for Spoilage and Blemished Items.”” Ensure that you create the same type as the paired account and always apply credits to asset accounts and debits to liability accounts. If the balance in your allowance for doubtful accounts has a credit of $1,000 and your accounts receivable has $20,000 in normal debit balance, then the net value of the receivables is $19,000. The contra asset account, which is allowance for doubtful accounts, indicates the original (gross) amount you report in the accounts receivable. It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet.
The net of these two figures is typically reported on a third line. A revenues account with a debit balance instead of the usual credit balance. Examples include https://www.bookstime.com/ sales returns, sales allowances, and sales discounts. You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
In new revenue account creation I see no mechanism or option for setting up a contra account (would have a debit balance vs. normal revenue credit balance). Sales Returns and Allowances is a contra-revenue account that is subtracted from Sales. Let’s review another example. Smith’s factory store’s credit card sales were $4,500 on December 15. The credit card company charges a 2.5% service fee.
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 contra revenue account products that are causing customers to return goods. A contra account is an account used in a general ledger to reduce the value of a related account.
Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price. You will earn the unearned revenue when you deliver the products or services later. The business will repay this cash received from the customer if it fails to fulfill its obligation before the customer.
- Let’s review another example.
- Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue.
- Both methods result in an adjustment to book value.
- Treasury stock and owner’s drawing account are examples of contra equity accounts.
- If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item.
- By understanding the concept of a contra account, it is possible to simply look at the accounting records of a given corporation and turn back through the financial history related to certain debits and credits in the records in order to gain an understanding of how they are related.
Contra liability account, which is rather uncommon. An example would be a contra liability account which would be debited to offset a regular liability account. Learn what contra accounts are, how they serve a useful purpose for bookkeepers, and how easy they are to set up.
In a sales returns and allowances https://www.bookstime.com/articles/contra-revenue-account, you offset the balance in the sales revenue account. When the contra account reads $500 and the normal credit balance is $100,000, then your net sales are $99,500.
This indicates that out of $100,000 sales, your customers return goods valued at $500. Examples of a contra revenue accounts include sales returns, sales discounts, and sales allowances. You debit the contra revenue accounts and credit the corresponding revenue accounts. For example, when you debit the balance in sales returns account, make sure that you offset the sales revenue account with a credit balance.
Although sales returns and sales allowances are technically two distinct types of transactions, they are generally recorded in the same account. Sales returns occur when customers return defective, damaged, or otherwise undesirable products to the seller.
A transaction is made under the sales return account when a customer returns a product to the company for a refund. Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services.
With contra equity accounts, you reduce the number of outstanding shares you list on your company’s balance sheet. Treasury stock and owner’s drawing account are examples of contra equity accounts. We will close sales discounts, sales returns and allowances, cost of goods sold, and all other operating and nonoperating expenses.
Allowance for Doubtful Accounts
The lender may offer the company a discount if it repays the note early. The discount on notes payable reduces the total amount of the note to reflect the discount given by the lender. 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.