The brand owner subtracts the costs of the programs from revenue received when calculating net revenue in general accounting. The purpose of a contra account is to accurately report value of operating performance and assets for a firm. A contra account is an account that records events like adjustments and transactions that are having an opposite effect on a relating account’s true value on the firm’s financial statements. If we record those events within the relating account, we risk losing information that is relevant to analyzing performance.
- For example, when the credit amount in allowance for doubtful accounts increases, it is also recorded in the bad debt expense as a debit increase.
- The percentage of sales method assumes that a fixed percentage of goods or services sold by a company cannot be received.
- Other contra account examples can be Allowance for Doubtful Accounts (also contra asset account), Bond discounts, which represent contra liability account, i.e. decrease bond payable account.
- The Johnson family is expecting visitors for the holidays and will need to furnish the spare bedroom.
- Brand owners need to manage conflict between their channel partners to ensure long-term engagement from the channel.
The Interpretation was developed by the IFRS Interpretations Committee (the ‘Interpretations Committee’) to address the accounting by the entity that grants award credits to its customers. IFRS 15 establishes the principles that an bookkeeping for startups entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer. Get instant access to video lessons taught by experienced investment bankers.
The Contra Revenue Account
The credit will be to the asset account or allowance for doubtful accounts. https://marketresearchtelecast.com/financial-planning-for-startups-how-accounting-services-can-help-new-ventures/292538/ accounts show the deducting adjustments to gross revenue or producing net revenue. Sales returned for a refund are posted to the contra account to reduce gross revenue or return on sales. The other side of the transaction is posted to cash because there is no value in retaining the sales transaction in the cash account. Accounting contra asset accounts or contra revenue accounts follow a simple double-accounting procedure to eliminate errors in financial reporting.
Examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, and Return on Sales. The Johnson family’s purchase of furniture illustrated the effect on the financial statements for two kinds of contra accounts, revenue, and asset. Contra accounts are also used in other areas of the financial statements, such as an estimate on an uncontrollable percentage of credit sales in which the amounts listed must be estimable and probable. When this happens, the debit will be added to the expense account Bad Debt Expense and the credit will be added to the asset account, Allowance for Doubtful Accounts.
Example of Contra Revenue
In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. The use of contra accounts ensures the accuracy of financial accounting records, as the value of the original accounts is not directly reduced. In the event that a contra account is not utilized, it can become increasingly troublesome to determine historical costs, which makes tax preparation time-consuming and difficult.