Contra revenue is the amount that an accountant would deduct from the gross revenue of a company to calculate the net revenue that it has earned. In other words, to calculate contra revenue, you should deduct your net revenue from the gross revenue. If you outsource your accounting (Also see Types of Accounting That You Should Know) task to an accounting firm in Johor Bahru, you may find out that the accountants will record the contra revenue transactions in the contra revenue accounts. Typically, these accounts have a debit balance, instead of having a credit balance as in the normal revenue (Also see The Difference Between Revenue and Retained Earnings) accounts.
There are three common types of contra revenue, which are the sales allowance, sales discount and sales returns.
In the case that the goods or products have some minor flaws or defects, the company may sell them with some allowance or rebate. For example, XYZ Corporation has some old storybooks in the stock, and it wants to sell them out. ABC Corporation is willing to buy these books, but it wants some discounts as the books are no longer new. The original price for those books is RM50,000 and XYZ Corporation has agreed to sell the books at RM45,000. Thus, XYZ Corporation will suffer a loss margin of RM5000. It should debit RM5000 to the sales allowance account and credit the same amount to the ABC Corporation’s account.
Besides, the company may give some discounts to its clients. As an instance, when a client purchases the goods by using cash, the company (Also see What is a Company Constitution in Malaysia?) may offer the clients some discounts for the prompt payment. Some companies would call it a cash discount.
On the other hand, the company will record an amount for sales returns when it has sold the goods, but its client returned all or part of the merchandise. This may happen due to various reasons, for example, the products are defective, or they are not what the customer wants. Sales return will cause a decrease in the company’s sales. If the company has made a sale on credit, the sales returns will decrease its debtor (Also see Can You Differentiate Debt and Liability?) too.
Contra revenue is very helpful as business owners will be able to know whether the specifications of the products are the most preferred by the customer. This is for them to understand where and how they should improve to meet the requirements of their clients.