Sales Discounts, Returns and Allowances: All You Need To Know

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What is Accounts Receivable Collection Period? (Definition, Formula, and Example)

The opposite of the revenue contra accounts Sales Discounts, Returns and Allowances are expense contra accounts Purchase Discounts, Returns and Allowances. However, if a company has not been prompt in paying their suppliers, then offering sales discounts can help alleviate the situation because now both parties are being treated equally. Sales discounts may induce a company to encourage prompt payment from its customers. The sooner a company receives cash after providing a good or service, the better off it is financially. An example of a sales discount is when a buyer is entitled to a 1% discount in exchange for paying within 10 days of the invoice date, rather than the normal 30 days. Hence, the term valuation account represents all types of balance sheet accounts related to their corresponding balance sheet accounts.

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A delivery van is purchased by a business to use in delivering product and picking up materials. The company uses Straight-Line Depreciation to track the loss of value of the asset over time. To illustrate a sales discount let’s assume that a manufacturer sells $900 of products and its credit terms are 1/10, n/30.

Double Entry Bookkeeping

Sales Returns contra revenue account records the value of a sales deduction attributable to goods returned by buyers in exchange for a refund. However, even though sales discounts are considered a type of promotion to encourage the early collection of debts from customers, companies should still be cautious in implementing it because in a way it decreases their revenue and net income. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000. Note that the asset account balance represents the purchase price of the asset in question, also known as its historical cost.

Better yet, consider investing in AI-powered accounting software to reduce mistakes. The sales allowances account contains either an allowance for reductions in the price of a product that has minor defects, or the actual amount of the allowance attributable to specific sales. A contra account enables a company to report the original amount while also reporting the appropriate downward adjustment. Accounting software can simplify the management of and reporting from your ledger. With the appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation.

List of Contra Accounts

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. Therefore, for these three, the debit balance actually represents a negative amount. When a contra asset account is first recorded in a journal entry, the offset is to an expense.

Get instant access to video lessons taught by experienced investment bankers. Suppose the XYZ company recorded only one invoice in their accounting period. A Cash contra expense account or Sales discount is the reduction in the price of a product or service offered to a customer by the seller to pay the due amount within a specified time period.

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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. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger. And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business. Because contra asset accounts are used so frequently, it’s worth spending a little bit more time on them here, including common subtypes. A contra asset account is an asset account where the account balance is a credit balance. It is described as “contra” because having a credit balance in an asset account is contrary to the normal or expected debit balance.

• In other words, accumulated depreciation will be $10,000 each year until the car depreciates to $0 twenty years later.
• While it is acceptable to record and report discounts, returns and allowances within the sales revenue account–especially for very small businesses–doing so leads to the loss of valuable information and insights.
• You may use accounting software packages, such as QuickBooks Online to set up contra accounts.
• The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.
• The allowance for doubtful accounts – often called a “bad debt reserve” – would be considered a contra asset since it causes the accounts receivable (A/R) balance to decline.