A contra revenues account is a type of contra account that is grouped with revenue on the income statement but carries a debit balance, reducing gross sales to net sales. Revenue accounts normally have credit balances, so the debit balance marks it as contra.
Sales returns, allowances and discounts
The most common contra revenues accounts are sales returns and allowances, for goods returned by customers or price reductions given for damaged or incorrect goods, and sales discounts, for early payment discounts that customers take. Using separate accounts, rather than simply debiting Sales, lets managers see how much revenue is being lost to returns and discounts.
Suppose a wholesaler records gross sales of $500,000 for the year. Customers return goods invoiced at $12,000 and take $3,000 of discounts for paying within 10 days. A return is recorded with a debit to Sales Returns and Allowances and a credit to Accounts Receivable, and a discount with a debit to Sales Discounts. The income statement then shows:
- Gross sales of $500,000.
- Less sales returns and allowances of $12,000 and sales discounts of $3,000.
- Net sales of $485,000.
Under the revenue standard ASC 606, companies must estimate expected returns and discounts when they record a sale and recognize revenue only for the amount they expect to keep, with a refund liability for the rest. Many still use contra revenues accounts in their books to track these items before reporting the net figure.