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.
What Is Contra Revenue?
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:
- Sales Allowances or Rebates — When a product doesn't live up to a customer's expectation or when it's defective, the seller may decide to give out sales allowances to save the sale. A sales allowance is the amount deducted from the actual selling price.
- Sales Returns — A sales return is when customers send the product or item back to the seller. While returns are more common for e-commerce businesses, for SaaS services, this could also look like a money-back customer satisfaction guarantee after a specific time period. The accounting department needs to record sales returns to help them keep accurate accounting data, analyze trends and understand profits.
- Sales Discount — A sales discount is a reduced item price in exchange for early payment or when a customer buys items in bulk. Startups may offer sales discounts to encourage more customers to purchase their products or services.
Let’s look a little closer at a couple of these types of contra revenue:
Contra Revenue Sales Returns Illustration
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.
Contra Revenue Sales Discount Illustration
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.
What Are The Advantages And Disadvantages Of Contra Revenue?
Advantages:
- It provides your company with the most accurate financial information.
- The sales allowances recorded in a contra revenue account can provide data about the products or services you're selling.
- You can also gauge the quality of your products and services based on the quantity of the returns.
- By offering sales discounts, you can increase your cash flow and reduce bad debts.
- Giving out discounts in the short team might also help you generate more revenue and build your customer base.
Disadvantages:
- Added time and cost for the accounting department to record the transactions.
- It could potentially decrease your profit. To avoid issues with contra revenue, have a policy in place for managing sales returns, sales discounts, and sales allowances.
- Accounting for contra revenue may be complex, especially for an inexperienced accountant or bookkeeper. Failure to record the transactions correctly can affect your cash account.
Why Is Contra Revenue Important For Bookkeeping?
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.
Zeni Helps Your Record Returns, Discounts, And Allowances
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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