Definition of Contra Revenue Account
A contra revenue account is a revenue account that is expected to have a debit balance (instead of the usual credit balance). In other words, its expected balance is contrary to—or opposite of—the usual credit balance in a revenue account.
A contra revenue account allows a company to see the original amount sold and to also see the items that reduced the sales to the amount of net sales.
Examples of Contra Revenue Accounts
Two examples of contra revenue accounts are:
- Sales Returns and Allowances
- Sales Discounts
To illustrate the contra revenue account Sales Returns and Allowances, let's assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and credit to Sales for $100,000. If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K's income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500.
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. Again, the company's management will see the original amount of sales, the sales discounts, and the resulting net sales.