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Startup Accounting
It's normal for businesses to receive refund requests or returns from customers. Providing discounts is also quite common.
If this is part of your business model, you’ll want to record every refund, return or discount in your contra revenue account to help you better understand the differences between your gross revenue and the net revenue.
Keep reading to learn more about contra revenue accounts and what should go in them.
Contra revenue is the difference between gross revenue and net revenue. However, it's not recorded as a credit but as a debit account.
Three of the most common contra revenue include:
Let’s look a little closer at a couple of these types of contra revenue:
Suppose your startup sells $50,000 worth of products on credit. You would debit $50,000 as Accounts Receivable and credit $50,000 as Sales. If your client returns $1000 of the products bought, you record Sales Returns and Allowances worth $1,000 as debit and credit $1000 as Accounts Receivable.
In your income statement, the gross sales are $50,000 less than the sales returns and allowances of $1000. The net sales are $49,000.
If Company A offers a two percent discount on the total amount if paid within a week instead of the usual 30 days, the company records the discounted amount in its contra account as Sales Discounts. The company would see the original amount, discounted sale, and net sales in the contra revenue account.
As mentioned, businesses use contra revenue accounts to understand net vs. gross revenue. The transactions are sometimes recorded in one or more accounts, but the balance is usually a debit. In a typical sales account, the balance is usually a credit. To determine the contra revenue, you simply deduct the gross sales from the net sales.
But remember, the revenue that your business expects but has not yet earned is not contra revenue. For example, if a subscriber signed up for an annual membership but is paying monthly and has only paid for one month, the remaining months are not earned yet. Instead, you would classify this transaction as a liability and record it within credit sales on your balance sheet.
Overall, the contra revenue account is helpful in bookkeeping as it minimizes unpredictable losses.
It’s crucial to have an accounting and bookkeeping team (whether outsourced or internal bookkeeping) to help ensure accuracy for your contra account. Better yet, consider investing in AI-powered accounting software to reduce mistakes.
At Zeni, we keep it simple for you to record all of your contra revenue in one dedicated place and view the changes to your accounts over time AND in real-time. Our AI-powered tool gives you daily access to your company's finances while our expert finance team double-checks the numbers every step of the way.
Ready to see how it all works? Book a demo below!
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