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A sales discount is a contra-revenue account with a debit balance that reduces the credit balance of the gross sales revenue on an income statement. So far, we’ve discussed contra asset accounts, which offset the value of asset account balances. Contra accounts can be used for all of the financial components on the balance sheet including assets, liabilities, and equity. (That is, you can have contra assets, contra liabilities, and contra equity.) In fact, contra accounts can even be reflected on the income statement in the form of contra revenue accounts.
Take, for instance, a business that had $20,000 in gross revenue during the period. $300 will be subtracted from $20,000 to get $19,700 in net sales. This is reported as ‘Net sales $19,700’ below the sales discounts line.
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This is because the initial accounting journal entry at the time of sale was a debit to Accounts Receivable asset account and credit to a Sales Revenue account. Sales Returns contra revenue account records the value of a sales deduction attributable to goods returned by buyers in exchange for a refund. The obsolete inventory reserve account is the contra account to inventory, another asset listed on the balance sheet. Products that become unusable are recorded in this contra account to show that they are still owned by the company, but they should be excluded from the market value of inventory. Of that amount, it is estimated that 1% of that amount will become bad debt at some point in the future. This means that the $85,000 balance is overstated compared to its real value.
- A contra equity account reduces the total number of outstanding shares listed on a company’s balance sheet.
- Oftentimes customers will return damaged goods, receive a discount from the typical selling price, or demand a refund for some other reason.
- Sales discounts will entice customers to pay ahead of time their credit purchases which in turn will improve the collection of a company’s accounts receivable.
- A cash budget is a financial plan that outlines a business’s expected cash inflows and outflows over a specific period, usually monthly or quarterly.
- Just in case you wanted to run a report from your accounts, you can click thedrop-down▼ button on the Action column and then selectRun report.
Net sales revenue is simply gross sales revenue less returns, allowances, and discounts. These deductions from gross sales revenue are called contra-revenue accounts, because they are subtracted from the sales figure. While sales and revenue accounts are increased by credits and decreased by debits, contra-revenue accounts are increased by debits and decreased by credits. Also, refer to contra-revenue accounts as contra sales accounts. 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.
What type of account is sales discounts?- Video
Contra assets are an important bookkeeping concept that helps balance a business’s books. In this article, we look closely at contra assets and the different types of contra accounts you may see on financial statements. Then, credit the sales revenue account by the same amount in the same journal entry. The accounts receivable as an asset account increase by the debit entry and the sales revenue unlike an asset account increases by a credit entry. Contra liability, equity, and revenue accounts have natural debit balances. These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.
Sales allowance represents discounts given to customers to entice them to keep products instead of returning them, such as with slightly defective items. The sales discount account represents the discount amount a company gives to customers as an incentive to purchase its products or services. There are four main types of contra accounts such as contra asset, contra revenue, contra liability, and contra equity. The contra revenue is a reduction from the gross revenue that a business reports, which results in net revenue. Contra-revenue transactions are reported in one or more contra-revenue accounts, that normally have a debit balance contrary to the credit balance in the typical revenue account.
Journal Entry
It is an account with the opposite balance to the asset account, with which such contra account is related. Suppose a company has recorded $100,000 in accounts receivable (A/R) and $10,000 in the allowance for doubtful accounts (i.e. 10% of A/R is estimated as uncollectible). A contra account is an account that is used to offset another account. The balance in the contra account is reduced when the corresponding asset or liability it is paired with is disposed of.
The contra revenue accounts commonly used in small-business accounting include sales returns, sales allowance and sale discounts. A contra revenue account carries a debit balance and reduces the total amount of a company’s revenue. The amount of gross revenue minus the amount recorded in the contra revenue accounts equal a company’s net revenue. A transaction is made under the sales return account when a customer returns a product to the company for a refund.
Give three examples of business activities that result in unearned revenues. All permanent accounts must be closed at the end of the accounting period. Customers’ accounts is sales discount a contra account that we no longer consider collectible are referred to as uncollectible accounts . A listing of the accounts in the general ledger is called the trial balance.
What type of expense is sales discount?
Definition of Sales Discounts
Sales discounts (along with sales returns and allowances) are deducted from gross sales to arrive at the company's net sales. Hence, the general ledger account Sales Discounts is a contra revenue account. Sales discounts are not reported as an expense.
A debit of $100 will be made to accounts receivable and a credit of $100 will be made to the sales revenue account. The contra account to the accounts receivable account is the allowance for doubtful accounts and is used to represent the amount of invoiced goods or services that the business does not expect to collect. Combining the value of the allowance for doubtful account and the accounts receivable balance gives a company the net amount of cash it can expect to receive from goods it has sold or services it has already provided.
