The contra account definition in business accounting is an account used in the general ledger for the purpose of reducing the amount in another account related to it. A general ledger is a comprehensive list of all accounts and their connected transactions in a business. A contra account balances the numbers from two or more accounts that are compared on the balance sheet. Normal accounts on the general ledger will usually have a debit balance, while contra accounts are typically either zero or hold a negative credit balance. You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
But in the real world, converting all of that potential into hard cash is highly unlikely, if not impossible. Instead, you need to record this value gap, and a contra asset account serves that http://kavkazoved.info/news/2014/10/08/armenia-russia-relationship-is-washington-able-to-see-reality.html purpose. Allowance for doubtful accounts (ADA) is a contra asset account used to create an allowance for customers who are not expected to pay the money owed for purchased goods or services.
Contra Revenue: Simplifying Returns, Discounts, And Allowances
Instead, it is reported at its full amount with an allowance for bad debts listed below it. Maybe more importantly, it shows investors and creditors what percentage of receivables the company is writing off. Contra revenue accounts, such as sales discounts and allowances, reduce http://sayings.ru/eproverb/sayings_2.html gross revenue, resulting in net revenue. For example, sales discounts are offered to customers who pay early, while sales allowances are given for damaged or returned goods. Contra liability accounts, like discounts on notes or bonds payable, decrease the balance of a liability.
Suppose Company A extends a two percent discount on the total amount for payments made within a week, deviating from the standard 30-day term. The company records the discounted portion in its contra account under Sales Discounts in this scenario. The contra revenue account reflects the original amount, the discounted sale, and the resulting net sales for the company. As can be seen using the two accounts, allows information about the original sale to be maintained on the revenue account, and details of the sale returns to be maintained on the sales returns contra revenue account. In double entry bookkeeping terms, a contra revenue account or contra sales account refers to an account which is offset against a revenue account.
How can businesses effectively track and record contra-revenue transactions?
Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance. Contra revenue accounts reduce revenue accounts and have a debit balance. Contra asset http://orient.by/news/iof/mediterranean_championships_sprint/ accounts include allowance for doubtful accounts and accumulated depreciation. Contra asset accounts are recorded with a credit balance that decreases the balance of an asset.
By recording these adjustments in separate contra accounts, financial statements become more transparent and provide a clearer picture of a company’s financial health. Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance. The list of asset accounts on your general ledger and balance sheet conveys the combined, potential value of all of the tangible and intangible items that your organization possesses.