If the amounts of these line items are minimal, they may be aggregated for reporting purposes into a single contra revenue line item. If Music World returns merchandise worth $100, Music Suppliers, Inc., prepares real estate bookkeeping a credit memorandum to account for the return. This credit memorandum becomes the source document for a journal entry that increases the sales returns and allowances account and decreases accounts receivable.
Note especially that for a large and complex business, the list may include hundreds or thousands of items. The same list of accounts remains in view throughout the firm’s entire accounting cycle. Business firms complete the full accounting cycle every reporting period. For public companies, this means ending a cycle every fiscal quarter as well fiscal year end. Exhibit 4 below, shows how account data move through the period.
In such cases, the seller may appoint one of its own sales staff as Account Manager, focusing primarily on that account. Account managers in this sense are responsible for sales performance with this customer. And, they are also responsible for building a continuing customer-seller relationship with the account. Each new business starts building its accounting system by creating a Chart of Accounts.
They are useful in preserving the historical value in the main account while presenting a write-down or decrease in a separate contra account that nets to the current book value. Contra accounts serve an invaluable function in financial reporting that enhances transparency in accounting books. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment.
Types of Contra Accounts for Revenues
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This can help anyone viewing the financial information to find the historical cost of the asset. The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. The balance in the allowance for doubtful accounts is used to find out the dollar value of the current accounts receivable balance that is deemed uncollectible. The balance sheet shows the amount in the asset section underneath the accounts receivable. The net value of both these figures is usually reported on a third line.
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N many situations, customers enter a relationship with sellers by creating accounts with them. The relationship between seller and customer then differs from the customer-seller relationship involved in a one-time purchase transaction. The Exhibit 5 Chart of accounts, below, is just an extract from real a chart of accounts. The purpose of this version is to show the general approach to account numbering and naming.