What is a Contra Revenue Account?

Define Contra Revenue Account

Contra means against. In mdct.ru terms, a contra revenue account refers to an account which is offset against a revenue account.

As an revenue account is normally a credit balance, a contra revenue account will normally be a debit balance. When the two balances are offset against each other they show the net balance of both accounts.

Contra revenue accounts are useful when in bookkeeping terms a business needs to keep the two accounts separate so as not to lose information, but for presentation reasons in the financial statements, it is necessary to offset them against each other and show a net balance.

Examples of Contra Revenue Accounts

The contra revenue accounts list includes the following:

  • Sales returns contra revenue account
  • Sales allowances contra revenue account
  • Sales discounts contra revenue account

Sales Returns Contra Revenue Account

The sales returns contra revenue account records the sales value of goods returned by a customer. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance. The net balance of the two accounts shows the net value of the sales made by the business for the accounting period.

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 the trial balance the accounts would appear as follows.

Trial balance extract showing contra revenue account
Account Debit Credit Notes
Revenue 5,000 Revenue account
Sales returns 1,000 Contra revenue account
…..

In the financial statements the revenue account would be offset against the contra revenue account to show the net balance.

Income statement extract showing contra revenue account
Revenue 5,000 Revenue account
Sales returns 1,000 Contra revenue account
Net revenue 4,000 Net revenue after offset

Sales Allowances Contra Revenue Account

The sales allowances account is similar in use to the sales returns account, except that it deals with allowances given against a defective product which the customer has kept and not returned to the business.

Sales Discounts Contra Revenue Account

The sales discounts contra revenue account records the discounts given to customers on sales made to them, normally a cash or settlement discount. The account is normally a debit balance and in use is offset against the revenue account which is normally a credit balance. The net balance of the two accounts shows the net value of the sales after discounts.

Using the two accounts, allows information about the original value of the sales revenue to be maintained on the revenue account, and details of the sales discounts to be maintained on the sales discounts contra revenue account

In the trial balance the accounts would appear as follows.

Trial balance extract showing contra revenue account
Account Debit Credit Notes
Revenue 8,000 Revenue account
Sales discounts account 2,000 Contra revenue account
…..

In the financial statements the revenue account would be offset against the contra revenue account to show the net balance.

Income statement extract showing contra revenue account
Revenue 8,000 Revenue account
Sales discounts account 2,000 Contra revenue account
Net revenue 6,000 Net balance after offset

Contra revenue accounts are commonly encountered, however, a business can also have other forms of contra accounts including:

  • Contra asset account – for example, depreciation, allowance for doubtful debts.
  • Contra equity account – for example, owner’s drawings account, treasury stock account
  • Contra liability account – for example, discount on bonds payable account
  • Contra expense account – for example, expense reimbursement by employees account

Is Unearned Revenue a Contra Account?

Unearned revenue is not a contra revenue account. Unearned revenue is revenue that the business has not yet earned, for example if the business has received an annual membership fee in advance, in month one, only one twelfth of the revenue has been earned and the remaining eleven months is unearned. The balance is held as a current liability (credit) on the balance sheet of the business.

What is a Contra Revenue Account? November 6th, 2016Team

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