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Contra Revenue

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAnkush Jain
Reviewed byDheeraj Vaidya, CFA, FRM

What is Contra Revenue?

Contra Revenue is a difference in gross revenue and net revenue. It usually has a debit balance and is a helpful tool for the company to know the product specifications, whether it is optimum or not, as per customer requirements.

Types of Contra Revenue

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Formula

CR = Gross Sales – Net Sales
Contra-Revenue

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Examples of Contra Revenue

Example #1 – Based on Sales Return

M/s L&T Limited sells the construction equipment machines to M/s ABC & Company for $15000.00 on Credit. After some days, M/s ABC & Co. return the construction equipment machines & $2000.00 due to a defect in them.

Contra Revenue Example 1

In the above case, the CR amount is $2000.00, which will be adjusted from sales to $15000.00, and in the accounting book, sales are to be recorded at $13000.00.

Example #2 – Based on Sales Allowance

M/s XYZ Company has some old fashion clothes, and they want to sell the same on an urgent basis. There is a customer in the market who wants to purchase such clothes, but he knows the market scenario of the cloth industry. M/s XYZ Company agrees to sell the goods for $ 5000 less than the original sale amount, which is $40000.00.

Contra Revenue Example 2

In the above case, the company will bear a loss margin of $5000.00 on clothes, and the same will be adjusted from the sales account. The CR amount is $5000.00

Example #3 – Based on Cash Discount

M/s EFG & Co. sells the Goods $10000.00 with Cash/Sales Discount @ 1% to M/s MNO & Co…

Example 3

In the above case, the company will bear a loss margin of $100, and the contra revenue amount is $100.00.

Accounting of Contra Revenue

Contra Revenue Example 3.1png

The company should minus the sales return/allowance/discount from gross sales in the above case.

There is one more method that can be used for accounting which is as below:-

Example 3.2png

In the above method, we debit the contra revenue account in the trading account, but generally, the company uses the first method of accounting for contra revenue.

Advantages

Disadvantages

Limitation

Important Points

Conclusion

The company should maintain a separate accounting of contra revenue for a better presentation of financial statements and estimate the product’s quality.

Recommended Articles

This has been a guide to what is Contra Revenue Account & its definition. Here we understand the formula of contra revenue along with journal entries examples, advantages, disadvantages, and limitations. You can learn more about accounting from the following articles –

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