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Although you may be familiar with the normal balance requirements of each classification, a contra account will have the opposite requirement. Learn about the meaning of contra accounts, how and why they are used, and how to account for balances with them. If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares a credit memorandum to account for the return. This credit memorandum becomes the source document for a journal entry that increases the sales returns and allowances account and decreases accounts receivable. The Balance sheet example running throughout the Business Encyclopedia has several contra account examples.
- Only one subtraction is needed, simplifying calculations before the availability of computers.
- All Income and expense accounts are summarized in the Equity Section in one line on the balance sheet called Retained Earnings.
- Operating revenue is revenue you receive from your business’s main activities, like sales.
- Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts.
- If a company has a high or fast-growing allowance as a percentage of accounts receivable, keep a close eye on it.
- For example, Service Revenue is a type of account that records sales from services you perform.
It is an account with the opposite balance to the asset account, with which such contra account is related. Contra account is the opposite account, related to the main account. The aim of contra account is to reduce balance of the main account and provide a separate and clear data in the accounting on the substance of such decrease. On the income statement, net income is computed by deducting all expenses from all revenues. Revenues are presented at the top part of the income statement, followed by the expenses. GAAP, the allowance for doubtful accounts represents management’s estimate of the percentage of “uncollectible” accounts receivable (i.e. the credit purchases from customers that are not expected to be paid).
What Is the Difference Between an Inventory Write-Off & Inventory Reserve?
The allowance for doubtful accounts is not specifically reported, but the 10 reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement.
A contra revenue account is a revenue account that is expected to have a debit balance . In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account. 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. Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price.
What Is the Difference Between a Sales Return & a Sales Allowance?
https://quick-bookkeeping.net/ returns, sales allowance and sale discounts are different examples of contra revenue accounts. Contra accounts such as these have a debit balance and are deducted from the total amount of a company’s revenue. The contra revenue account is a reduction from gross revenue, which results in net revenue. These transactions are reported in one or more contra revenue accounts, which usually have a debit balance and reduce the total amount of the company’s net revenue.
