The assets are always shown on the left-hand side, and the liabilities are always displayed on the right-hand side. This what is contra revenue would allow the company to track the amount of money that has been borrowed. The contra liability account would be used to offset the liability account on the balance sheet. In your income statement, the gross sales are $50,000 less than the sales returns and allowances of $1000. It is important to realize that unearned revenue is not a contra revenues account.
Select the Account Type
Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. The allowance for doubtful accounts is not specifically reported, but the 10(K) 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 revenues account with a debit balance instead of the usual credit balance.
- Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting period.
- It is important to realize that unearned revenue is not a contra revenues account.
- And let’s not forget the all-important Allowance for Doubtful Accounts, acting as a financial crystal ball that estimates the portion of accounts receivable that might just turn into fairy dust.
Use of Accounting Software
- Those are expenses, too, because, without them, you wouldn’t have had a store in which to sell the shoes and collect the revenue.
- The first step in setting up a contra revenue account is creating the account within your accounting software.
- Revenue is an income statement account, but it flows through to the equity section of retained earnings as well.
- Understanding how contra revenue accounts impact financial ratios is essential for assessing a company’s financial health.
- Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers.
- And why stop at just theory when you can apply what you’ve learned using premium templates?
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.
Best practices for documentation
Although the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. 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.
Presentation of Contra Accounts
That’s because, as far as accounting is concerned, you haven’t really “spent” $20. You’ve just converted $20 worth of cash into $20 worth of shoes; an asset that remains in your inventory. Since you no longer have the shoes, aka the asset, you bookkeeping record a $20 expense on your income statement, But you also record $30 in revenue from the sale, so your net income is $10.
A contra liability account is not classified as a liability, since it does not represent a future obligation. Expenses are the costs of operating your business, like rent, salaries, and utilities. Contra revenue, on the other hand, directly reduces the sales figures reported on your financial statements. While both affect your net income, they do so in different parts of your income statement. These deductions, which come in the form of sales returns, allowances, and discounts, are not expenses but adjustments that lower the total sales on your income statement.
Maximizing Financial Performance with Effective Contra Account Management
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