Contra Account: A Complete Guide + Examples

Under the periodic inventory system, there is only one journal entry to record the sales return and allowances. The cost of goods sold and a reduction in merchandise inventory is not recorded. A contra asset account is an asset account where the account balance is a credit balance. It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance. (A debit balance in a contra asset account will violate the cost principle.) Learn more about contra asset accounts.

Sales Discounts

Therefore, the customer returns such goods back to ABC Co with a value of $500. At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time. Our AI-powered tool gives you daily access to your company’s finances while our expert finance team double-checks the numbers every step of the way. When preparing an income statement, the amount in the sales return allowance is deducted from the total sales to calculate the company’s actual sales/net sales. It depends on whether the sale of those goods that were returned were cash sales or credit sales. Those who are struggling with recording contra accounts may benefit from utilizing some of the best accounting software currently available.

• Since the sales account normally has a credit balance, returns and allowances could be recorded on the debit side (the reduction side) of the sales account.
• The accounts that are related to each other (the ones with the same column heading) are said to be controlled by or linked to each other, and they share a common control account.
• If you debit the contra account, ensure that you offset the related account with a credit balance.
• Generally in the financial statements the revenue account would be offset against the contra revenue account to show the net balance.
• Businesses leverage contra-revenue accounts to distinguish between net and gross revenue.
• The company records the discounted portion in its contra account under Sales Discounts in this scenario.

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• In addition, you can examine the impact of sales discounts on increases in sales, to see if it makes sense to continue offering discounts in order to boost profits.
• The balance is held as a current liability (credit) on the balance sheet of the business.
• Our AI-powered tool gives you daily access to your company’s finances while our expert finance team double-checks the numbers every step of the way.
• If a client returns $1,000 worth of products, you record Sales Returns and Allowances by debiting $1,000 and crediting $1,000 to Accounts Receivable.
• He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

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. A contra sales revenue account–such as Sales Allowances, Returns and Discounts-has a debit balance because it is contrary to the credit balance of a regular Sales Revenue account. You may use accounting software packages, such as QuickBooks Online to set up contra accounts. Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).

Impact on financial statements

However, to improve the bookkeeping process, returns and allowances are often recorded in a separate account entitled sales returns and allowances. Under the perpetual inventory system, there is an additional entry to include the cost of goods sold and its correspondence entry of merchandise inventory. This is because the sales return and allowances result in a reduction in the cost of goods sold and an increase in merchandise inventory. A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance).

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The difference between an asset’s balance and the contra account asset balance is the book value. When a contra asset account is first recorded in a journal entry, the offset is to an expense. For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense. Sales returns contra expense account involve products returned by customers, allowances are deductions due to product issues, and discounts are reduced prices for early payment or bulk purchases. A seller will then have to record a sales return by debiting a Sales Return and Allowances account and crediting the Accounts Receivable account in a case where the sale is made on credit.

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. Because if you sell products at your business, you know that not all customers are satisfied. If a customer wants to bring back an item, you need to make sales returns and allowances journal entries. In this article, we cover the accounting for sales returns and allowances; especially the sales returns and allowances journal entry under both periodic and perpetual inventory systems. If a company offers an early payment discount (such as 1% or 2% of the invoice amount if it is paid within 10 days instead of the required 30 days) the amount of the discount is recorded in the contra revenue account Sales Discounts.

You can use contra accounts to record the goods your customers return, inventory that gets damaged, and equipment depreciation. Sales returns refer to actual returns of goods from customers because defective or wrong products were delivered. Sales allowance arises when the customer agrees to keep the products at a price lower than the original price.

Equity Contra Account

Both of these accounts are contra accounts, which means that they offset gross sales. The natural balance in these accounts is a debit, which is the reverse of the natural credit balance in the gross sales account. Contra asset accounts include allowance for doubtful accounts and accumulated depreciation.

• Your responsibilities depend on how the original purchase was made and how you plan on reimbursing the customer.
• A contra liability is a general ledger account with a debit balance that reduces the normal credit balance of a standard liability account to present the net value on a balance sheet.
• Therefore, sales returns should not cause too much concern for companies.
• A key example of contra liabilities includes discounts on notes or bonds payable.
• A contra revenue account that reports 1) merchandise returned by a customer, and 2) the allowances granted to a customer because the seller shipped improper or defective merchandise.
• As mentioned above, sales return and allowances is a contra account of sales revenue account.

Sales Returns and Allowances Journal

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