Contra Account Definition + Journal Entry Examples

what is contra revenue

In total, the brand owner spends 8% ($80,000) on incentives given to the distributor. This $80,000 is typically subtracted from revenue to calculate the net revenue of $920,000.

Is a contra revenue account an asset?

In bookkeeping, a contra asset account is an asset account in which the natural balance of the account will either be a zero or a credit (negative) balance. The account offsets the balance in the respective asset account that it is paired with on the balance sheet.

Each of these accounts helps to offset another account on the balance sheet. The allowance method of accounting enables a company to determine the amount reasonable to be recorded in the 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. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line.

What is Contra Account?

The company should know the reasons for the increase in contra-revenue every month to save extra cost and time. In the above case, the company will bear a loss margin of $100, and the contra revenue amount is $100.00. She is a Business Content writer and Management contributor at, where she contributes a business article weekly. She has over 2 years of experience in writing what is contra revenue about accounting, finance, and business. Revenue Recognition handles refunds and disputes by generating contra revenue to offset already recognized revenue. To add a service period or split a payment into different revenue recognition schedules. This allows you to customize revenue treatment behavior and configure rules such as payment amount, description, and customer email.

Accountants use contra accounts rather than reduce the value of the original account directly to keep financial accounting records clean. If a contra account is not used, it can be difficult to determine historical costs, which can make tax preparation more difficult and time-consuming. Again, the company’s management will see the original amount of sales, the sales discounts, and the resulting net sales. Contra revenue accounts appear near the top of the income statement, as a deduction from gross revenue.

Types of revenue accounts

Accumulated depreciation reduces costs of asset and contra account is used to have cost value and accumulated depreciation separately. These accounts highlight the amount which offsets a paired related specific account. For a business owner, it is imperative to comprehend how to set up a contra revenue account that provides you with the podium to prepare and manage precise financial records.

what is contra revenue

Contra accounts are used to reduce the original account directly, keeping financial accounting records clean. The difference between an asset’s balance and the contra account asset balance is the book value. The three common contra revenue accounts are sales allowance, sales return and sales discount accounts. A sales allowance account is used to record all the reductions that a company allows to its customers to buy defective or damaged goods. Let’s have a deeper understanding of the contra asset vs contra revenue with the help of examples. One of the most known examples of contra asset is depreciation.

Motley Fool Returns

The amount on the equity contra account is deducted from the value of the total number of outstanding shares listed on a company’s balance sheet. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period. 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.

  • Here is an example of a journal entry you would create when you make a sale .
  • The contra asset account and contra revenue account are different in the way that one causes the reduction of the asset account while the other is causing a reduction to the revenue account.
  • Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.
  • The balance in the allowance for doubtful accounts represents the dollar amount of the current accounts receivable balance that is expected to be uncollectible.
  • Sales allowances are price reductions offered to persuade customers to accept merchandise with damage or minor defects not serious enough to warrant a return.
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