Contra revenue is a deduction from the gross revenue reported by a business, which results in net revenue. Contra revenue transactions are recorded in one or more contra revenue accounts, which usually have a debit balance (as opposed to the credit balance in the typical revenue account). There are three commonly used contra revenue accounts, which are:
- Sales returns. Contains either an allowance for returned goods, or the actual amount of revenue deduction attributable to returned goods.
- Sales allowances. 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.
- Sales discounts. Contains the amount of sales discounts given to customers, which is usually a discount given in exchange for early payments by customers.
You can also record contra revenue within the sales account, but this means that it will be buried within the total amount of revenue reported, so that management cannot easily determine the amount of contra revenue. If your company has minimal contra revenue activity, it is acceptable to record these transactions within the revenue account.
It is especially important to track sales returns separately and on a trend line, since this can provide important evidence of problems with a company's products that are causing customers to return goods.
Contra revenue accounts appear near the top of the income statement, as a deduction from gross sales. If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item.