Introduction Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fairRead more
Introduction
Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fair view of the affairs of the entity.
In audit reports, an auditor uses the term ‘true and fair’ is used to express that the financial statements are free from any kind of material misstatement and depict a correct financial image of the entity.
The term holds great significance in the audit reports of entities and auditors have to use this term carefully.
Meaning of ‘True’ and ‘Fair’
The term consists of two words, ‘True’ and ‘Fair’. Let’s understand what each of these words actually means.
True
The word ‘true’ suggests that the auditor, after examining the financial statements, has found no material misstatement whether due to error or fraud. The financial information depicted by the financial statements and the underlying accounting records is correct. The preparation and presentation of the financial statements are in accordance with the accounting standards applicable to the entity.
Fair
The word ‘fair’ means the financial information presented through the financial statement does not have an element of bias or sugar coating. There is a faithful presentation of financial information and the amounts at which the assets and liabilities, income and expenses and equity are shown is justified.
Meaning A valuation account is a balance sheet account that is paired with another balance sheet account to report the carrying amount of the paired account at a reduced value. The purpose of a valuation account is to reduce the balance of the concerned asset or liability without affecting the mainRead more
Meaning
A valuation account is a balance sheet account that is paired with another balance sheet account to report the carrying amount of the paired account at a reduced value.
The purpose of a valuation account is to reduce the balance of the concerned asset or liability without affecting the main ledger account. This is a conservative approach to use valuation accounts to present the value of the concerned asset or liability at a reduced value.
The most common example of a valuation account is the ‘Provision for doubtful debts account’. It appears in the balance sheet as a reduction from the debtors’ accounts. Also when the amount is transferred to this provision, it appears in the statement of profit and loss account. But it doesn’t appear in the debtors’ account ledger.
Treatment
A valuation account appears only in the balance sheet. Sometimes, it also appears in the profit and loss account when any amount is transferred to it.
Valuation accounts are only used in accrual accounting. They cannot be used in cash-based accounting as there is no flow of cash related to valuation accounts.
They have a balance opposite of their paired accounts i.e. if their paired account is an asset then they will have a credit balance and if it is a liability then they will have a debit balance.
Other Examples of valuation accounts are as follows:
Provision for doubtful debts (offsets the account receivables or debtors’ account)
Accumulated depreciation (report the assets net of depreciation)
Discount on bonds payable (reduces the reporting balance of bond payable account)
Meaning We know that an account in ledger format has two amount columns i.e. debit and credit amount columns. Now, most of the time, the total of debit and credit sides do not match. The difference between their totals is called the balance of the account and it is posted on the shorter side. ThisRead more
Meaning
We know that an account in ledger format has two amount columns i.e. debit and credit amount columns. Now, most of the time, the total of debit and credit sides do not match. The difference between their totals is called the balance of the account and it is posted on the shorter side. This result in equalling the total of both sides, hence this act is called ‘balancing an account.
Types of balances
Balancing an account is a very usual practice so that the balance of an account can be known. An account can have two types of balances:
Debit balance, where the debit side total is more than the credit side total.
Credit balance, where the credit side is more than the debit side total.
The balance of an account is posted on the shorter side. It means:
The debit balance will be shown on the credit side as the credit side total is shorter. (posted as ‘By Balance c/d’)
The credit balance will be shown on the debit side as the debit side total is shorter (posted as ‘To Balance c/d’)
Example
The following is a cash account that is not balanced:
We can see the debit side is ₹800 more than the credit side. It means there is a debit balance. It will be posted on the credit side as ‘By balance c/d’ to balance the account.
Exceptions
Balance of the income and the expense accounts (nominal accounts)are not computed. Instead, they are closed to trading account or profit and loss account to balance their amount totals. For example, the salaries account and sales accounts
Only the balance of the following types of accounts are computed and carried forwarded to successive accounting years:
Assets
Liabilities
Capital
The balance of these accounts is shown on the trial balance and balance sheet as well.
When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following: Furniture A/c Dr. Amt To Cash/Bank / Vendor A/c Cr. Amt (Being furniture purchased for office use) Explanation of the journal as per the goRead more
When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following:
Furniture A/c
Dr.
Amt
To Cash/Bank / Vendor A/c
Cr.
Amt
(Being furniture purchased for office use)
Explanation of the journal as per the golden rules of accounting
The furniture account is a real account because it represents a material asset and the golden rule for real accounts is “Debit what comes in, credit what goes out”. Hence, the furniture account is debited as it is increased. The cash and bank are also real accounts and they are debited because there is an outflow from cash or bank.
If the furniture is purchased on credit then the vendor account is credited. A vendor account represents a person and the golden rule for personal accounts is, “Debit the receiver, credit the giver”. It is credited as the furniture is given by the vendor.
Explanation of journal as per modern rules of accounting
The furniture account is an asset account hence it is debited as asset accounts are debited on increase. Cash and bank accounts are also assets accounts and they are credited as they are decreased on the purchase of furniture.
A vendor account is a liability account as there is an obligation to pay the vendor. It is credited as it is increased. Liability accounts are credited on the increase and vice versa.
When furniture is purchased for personal use
If the furniture is purchased for personal use and the payment is made or is to be made out of business, then the asset will not be recognised as an asset for the business and it will be recorded as a drawing. It will be deducted out of capital. The journal entry will be the following:
In trial balance, the treatment of the general reserve is that it is presented on the credit side. A trial balance is a statement prepared to check the arithmetical accuracy of the books of accounts. It features the closing balances of all the assets, liabilities and equity of a business. General reRead more
In trial balance, the treatment of the general reserve is that it is presented on the credit side.
A trial balance is a statement prepared to check the arithmetical accuracy of the books of accounts. It features the closing balances of all the assets, liabilities and equity of a business.
General reserve is a free reserve created out of revenue profits of a business to meet future needs and uncertainties. By free reserve, we mean dividends can be freely declared and distributed out of it.
Since the general reserve is an internal liability i.e. liability to the owner or owners or the business, it has a credit balance and is hence shown on the credit side of the trial balance.
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them. Bad debts We know, debtors for a business are their assets because the business has the right to receive moneyRead more
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them.
Bad debts
We know, debtors for a business are their assets because the business has the right to receive money from the debtors due to the goods supplied to them.
But if due to circumstances, there appears no probability that the amount due to one or more debtors will be realised to the business, then such debts are categorised as bad debts.
In short, bad debts refer to the amount of money that will not be received from some debtors of the business due to some circumstances like insolvency of debtor etc.
Bad debt is deducted from debtors account by the following journal entry:
Bad debts A/c
Dr.
Amt
To Debtors A/c
Cr.
Amt
(Being bad debts written off from debtors)
As bad debts are losses to a business, it is ultimately written off from the profit and loss account.
Profit and loss A/c
Dr.
Amt
To Bad debts A/c
Cr.
Amt
(Being bad debts written off to profit and loss account)
Write off
In layman terms, write off means to deduct something out from something. In accounting, write off means to deduct or reduce value of assets by crediting it to a liability account which is usually a reserve account or the profit and loss account.
It also refers to the elimination of an item from the books of accounts particularly losses and expenses.
Generally, writing off is associated with the following:
Bad debts.
Damaged Inventories.
Loss on issue or redemption of debentures.
Preliminary expenses.
Bad loans and advances.
Write off can be done in one of the following methods:
Direct write-off: The write off is directly done by crediting asset account or loss account and debiting the reserve or P/L account.
Indirect write-off: Here, an intermediate account is involved between the asset account and liabilities account. A common example is writing off of bad debts where the bad debts account is the intermediate account.
Hence, the following differences can be observed between bad debts and write off or writing off:
Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided. The rate of depreciation to be charged on mobile phones is 15Read more
Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided.
The rate of depreciation to be charged on mobile phones is 15% WDV* as per the Income Tax Act. The rates as per the companies act, 2013 are 4.75% SLM** and 13.91% WDV*.
*Written Down Value **Straight Line Method
A company has to charge depreciation on mobiles in their books as per the rates of Companies Act, 2013.
Any business or entity other than a company can choose the rate as per the Income Tax Act, 1961 which is 15% WDV. It is a general practice for non-corporates to charge depreciation in their books as per the rates of the Income Tax Act.
An important thing to know is that as per the Income Tax Act, 1961, mobile phones are treated as plants and machinery and the general rate of 15% is applied to it.
One may consider mobile phones as computers and charge depreciation at the rate of 40%. However, such a practice is not correct. Mobile phones are not considered equivalent to computers and there is case judgment given by Madras High Court which backs this consideration. The case is of Federal Bank Ltd. vs. ACIT (supra).
Therefore we are bound to this case judgment and should treat mobile phones as part of plant and machinery and charge depreciation on it accordingly for the time being.
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received. The journal entry is: An entity may receive cash in the following evRead more
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received.
The journal entry is:
An entity may receive cash in the following events:
Sales of goods or provision of services
Payment from account receivables
Sale of assets.
Withdrawal of cash from the bank
Introduction of additional capital in the business
Subscription or donation received in case of non-profit oriented concerns.
Other income in cash
This list is not exhaustive. There may be many such events. However, the cash account will be always debited.
Rules of accounting applicable on the cash account
As per the golden rules of accounting, the cash account is a real account as represents an asset. For real accounts, the rule, “Debit the receiver and credit the giver” applies.
Hence, when cash is received, cash is debited and the source (giver) is credited.
As per modern rules of accounting, the cash account is an asset account. Assets accounts are debited when increased and credited when decreased.
Hence, at receipt of cash, cash is debited as cash is increased.
Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more
Negative working capital means the excess of current liabilities over current assets in an enterprise.
Let’s understand what working capital is to get more clarity about negative working capital.
Meaning of Working Capital
Working Capital refers to the difference between current assets and current liabilities of a business.
Working Capital = Current Assets – Current Liabilities
It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.
Items under Current Assets and Current Liabilities
It is important to know about the items under current assets and current liabilities to understand the significance of working capital.
Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.
Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.
Types of working capital
Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:
Positive (Current assets > Current liabilities)
Zero (Current assets = Current liabilities)
Negative (Current assets < Current liabilities)
Hence, negative working capital exists when current liabilities are more than current assets.
Implications of having negative working capital
Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.
An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.
The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.
The term ‘contra’ means 'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more
The term ‘contra’ means ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.
The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.
These are the contra revenue accounts commonly seen in businesses:
Sales return account: This account records the amount of goods sold returned by customers. The journal entry for recording sale return is as follow:
The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.
Sale Discount account: This account records the amount of discount allowed to customers. The journal entry for recording sale discounts is as follows:
Sales discount is an expense hence it is debited to the profit and loss account.
Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:
What is the concept of ‘true and fair’ in auditing?
Introduction Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fairRead more
Introduction
Audit refers to an independent examination of the financial information of any entity to express an opinion on the financial statements of the entity. An audit is conducted to ensure that the financial statements of the entity whose books of accounts are audited reflect a true and fair view of the affairs of the entity.
In audit reports, an auditor uses the term ‘true and fair’ is used to express that the financial statements are free from any kind of material misstatement and depict a correct financial image of the entity.
The term holds great significance in the audit reports of entities and auditors have to use this term carefully.
Meaning of ‘True’ and ‘Fair’
The term consists of two words, ‘True’ and ‘Fair’. Let’s understand what each of these words actually means.
True
The word ‘true’ suggests that the auditor, after examining the financial statements, has found no material misstatement whether due to error or fraud. The financial information depicted by the financial statements and the underlying accounting records is correct. The preparation and presentation of the financial statements are in accordance with the accounting standards applicable to the entity.
Fair
The word ‘fair’ means the financial information presented through the financial statement does not have an element of bias or sugar coating. There is a faithful presentation of financial information and the amounts at which the assets and liabilities, income and expenses and equity are shown is justified.
See lessWhat is a valuation account?
Meaning A valuation account is a balance sheet account that is paired with another balance sheet account to report the carrying amount of the paired account at a reduced value. The purpose of a valuation account is to reduce the balance of the concerned asset or liability without affecting the mainRead more
Meaning
A valuation account is a balance sheet account that is paired with another balance sheet account to report the carrying amount of the paired account at a reduced value.
The purpose of a valuation account is to reduce the balance of the concerned asset or liability without affecting the main ledger account. This is a conservative approach to use valuation accounts to present the value of the concerned asset or liability at a reduced value.
The most common example of a valuation account is the ‘Provision for doubtful debts account’. It appears in the balance sheet as a reduction from the debtors’ accounts. Also when the amount is transferred to this provision, it appears in the statement of profit and loss account. But it doesn’t appear in the debtors’ account ledger.
Treatment
A valuation account appears only in the balance sheet. Sometimes, it also appears in the profit and loss account when any amount is transferred to it.
Valuation accounts are only used in accrual accounting. They cannot be used in cash-based accounting as there is no flow of cash related to valuation accounts.
They have a balance opposite of their paired accounts i.e. if their paired account is an asset then they will have a credit balance and if it is a liability then they will have a debit balance.
Other Examples of valuation accounts are as follows:
- Provision for doubtful debts (offsets the account receivables or debtors’ account)
- Accumulated depreciation (report the assets net of depreciation)
- Discount on bonds payable (reduces the reporting balance of bond payable account)
See lessWhat is the meaning of balancing an account?
Meaning We know that an account in ledger format has two amount columns i.e. debit and credit amount columns. Now, most of the time, the total of debit and credit sides do not match. The difference between their totals is called the balance of the account and it is posted on the shorter side. ThisRead more
Meaning
We know that an account in ledger format has two amount columns i.e. debit and credit amount columns. Now, most of the time, the total of debit and credit sides do not match. The difference between their totals is called the balance of the account and it is posted on the shorter side. This result in equalling the total of both sides, hence this act is called ‘balancing an account.
Types of balances
Balancing an account is a very usual practice so that the balance of an account can be known. An account can have two types of balances:
The balance of an account is posted on the shorter side. It means:
Example
The following is a cash account that is not balanced:
We can see the debit side is ₹800 more than the credit side. It means there is a debit balance. It will be posted on the credit side as ‘By balance c/d’ to balance the account.
Exceptions
Balance of the income and the expense accounts (nominal accounts)are not computed. Instead, they are closed to trading account or profit and loss account to balance their amount totals. For example, the salaries account and sales accounts
Only the balance of the following types of accounts are computed and carried forwarded to successive accounting years:
The balance of these accounts is shown on the trial balance and balance sheet as well.
See lessWhat is furniture purchased for office use journal entry?
When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following: Furniture A/c Dr. Amt To Cash/Bank / Vendor A/c Cr. Amt (Being furniture purchased for office use) Explanation of the journal as per the goRead more
When it is said that furniture is purchased for office use, it means it is an asset for the business and the journal entry for this event will be the following:
Explanation of the journal as per the golden rules of accounting
The furniture account is a real account because it represents a material asset and the golden rule for real accounts is “Debit what comes in, credit what goes out”. Hence, the furniture account is debited as it is increased. The cash and bank are also real accounts and they are debited because there is an outflow from cash or bank.
If the furniture is purchased on credit then the vendor account is credited. A vendor account represents a person and the golden rule for personal accounts is, “Debit the receiver, credit the giver”. It is credited as the furniture is given by the vendor.
Explanation of journal as per modern rules of accounting
The furniture account is an asset account hence it is debited as asset accounts are debited on increase. Cash and bank accounts are also assets accounts and they are credited as they are decreased on the purchase of furniture.
A vendor account is a liability account as there is an obligation to pay the vendor. It is credited as it is increased. Liability accounts are credited on the increase and vice versa.
When furniture is purchased for personal use
If the furniture is purchased for personal use and the payment is made or is to be made out of business, then the asset will not be recognised as an asset for the business and it will be recorded as a drawing. It will be deducted out of capital. The journal entry will be the following:
See lessWhat is the treatment of general reserve in trial balance?
In trial balance, the treatment of the general reserve is that it is presented on the credit side. A trial balance is a statement prepared to check the arithmetical accuracy of the books of accounts. It features the closing balances of all the assets, liabilities and equity of a business. General reRead more
In trial balance, the treatment of the general reserve is that it is presented on the credit side.
A trial balance is a statement prepared to check the arithmetical accuracy of the books of accounts. It features the closing balances of all the assets, liabilities and equity of a business.
General reserve is a free reserve created out of revenue profits of a business to meet future needs and uncertainties. By free reserve, we mean dividends can be freely declared and distributed out of it.
Since the general reserve is an internal liability i.e. liability to the owner or owners or the business, it has a credit balance and is hence shown on the credit side of the trial balance.
See lessWhat is the difference between bad debt and write off?
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them. Bad debts We know, debtors for a business are their assets because the business has the right to receive moneyRead more
The term ‘bad debt’ and ‘write off’ are often used together in a sentence but they have different meanings. First, we will discuss them in brief to understand the differences between them.
Bad debts
We know, debtors for a business are their assets because the business has the right to receive money from the debtors due to the goods supplied to them.
But if due to circumstances, there appears no probability that the amount due to one or more debtors will be realised to the business, then such debts are categorised as bad debts.
In short, bad debts refer to the amount of money that will not be received from some debtors of the business due to some circumstances like insolvency of debtor etc.
Bad debt is deducted from debtors account by the following journal entry:
As bad debts are losses to a business, it is ultimately written off from the profit and loss account.
Write off
In layman terms, write off means to deduct something out from something. In accounting, write off means to deduct or reduce value of assets by crediting it to a liability account which is usually a reserve account or the profit and loss account.
It also refers to the elimination of an item from the books of accounts particularly losses and expenses.
Generally, writing off is associated with the following:
Write off can be done in one of the following methods:
Hence, the following differences can be observed between bad debts and write off or writing off:
See lessWhat is mobile phone depreciation rate?
Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided. The rate of depreciation to be charged on mobile phones is 15Read more
Today, mobile phones especially smartphones are an indispensable part of most businesses and they qualify as fixed assets as they usually last for more than a year. Being a fixed asset, the depreciation on mobile phones is to be provided.
The rate of depreciation to be charged on mobile phones is 15% WDV* as per the Income Tax Act. The rates as per the companies act, 2013 are 4.75% SLM** and 13.91% WDV*.
*Written Down Value **Straight Line Method
A company has to charge depreciation on mobiles in their books as per the rates of Companies Act, 2013.
Any business or entity other than a company can choose the rate as per the Income Tax Act, 1961 which is 15% WDV. It is a general practice for non-corporates to charge depreciation in their books as per the rates of the Income Tax Act.
An important thing to know is that as per the Income Tax Act, 1961, mobile phones are treated as plants and machinery and the general rate of 15% is applied to it.
One may consider mobile phones as computers and charge depreciation at the rate of 40%. However, such a practice is not correct. Mobile phones are not considered equivalent to computers and there is case judgment given by Madras High Court which backs this consideration. The case is of Federal Bank Ltd. vs. ACIT (supra).
Therefore we are bound to this case judgment and should treat mobile phones as part of plant and machinery and charge depreciation on it accordingly for the time being.
See lessWhat is the journal entry for received cash?
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received. The journal entry is: An entity may receive cash in the following evRead more
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received.
The journal entry is:
An entity may receive cash in the following events:
This list is not exhaustive. There may be many such events. However, the cash account will be always debited.
Rules of accounting applicable on the cash account
As per the golden rules of accounting, the cash account is a real account as represents an asset. For real accounts, the rule, “Debit the receiver and credit the giver” applies.
Hence, when cash is received, cash is debited and the source (giver) is credited.
As per modern rules of accounting, the cash account is an asset account. Assets accounts are debited when increased and credited when decreased.
Hence, at receipt of cash, cash is debited as cash is increased.
See lessWhat is the meaning of negative working capital?
Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more
Negative working capital means the excess of current liabilities over current assets in an enterprise.
Let’s understand what working capital is to get more clarity about negative working capital.
Meaning of Working Capital
Working Capital refers to the difference between current assets and current liabilities of a business.
Working Capital = Current Assets – Current Liabilities
It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.
Items under Current Assets and Current Liabilities
It is important to know about the items under current assets and current liabilities to understand the significance of working capital.
Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.
Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.
Types of working capital
Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:
Hence, negative working capital exists when current liabilities are more than current assets.
Implications of having negative working capital
Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.
An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.
The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.
Current Assets = 2(Current Liabilities)
See lessWhat is a contra revenue account?
The term ‘contra’ means 'opposite'. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance. The purpose of the contra revenue account is to ascertain the actuaRead more
The term ‘contra’ means ‘opposite’. Therefore, a contra revenue account is an account that is opposite of the revenue accounts of a business i.e. sales account. It has the opposite balance of the revenue account i.e. debit balance.
The purpose of the contra revenue account is to ascertain the actual amount of sales and record the items which have reduced the sales.
These are the contra revenue accounts commonly seen in businesses:
The total sales return is deducted from the sales in the balance sheet. Though being opposite of the sales account, the sale return account is not an expense account. It is considered an indirect loss as it reduces sales.
Sales discount is an expense hence it is debited to the profit and loss account.
Sales returns and sales discounts are shown in the trading and profit and loss account in the following manner:
See less