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“While the Sales account is credited to recognize revenue, any cash discounts granted, because the sales invoices are paid within the credit terms, are debited to a Sales Discounts account.Similarly, the Sales Returns and Allowances account is debited when a Credit Memo is issued to customers upon return of goods or for price adjustments when customers are dissatisfied with the merchandise received. The Sales Discounts and Sales Returns and Allowances accounts are called Sales contra accounts since their normal balances are opposite the Sales account balance and they are always combined with the Sales account to compute the Sales (technically Net Sales) reported on the income statement.” Examples : 1)If the balance in the Allowance account is a credit of $2,000 and the Accounts Receivable account has a normal debit balance of $40,000, the net realizable value of the receivables is $38,000. The use of this contra account allows 1) the original amount of uncollected sales invoices to continue to be reported in Accounts Receivable, and 2) the net amount of $38,000 to be reported on the balance sheet as the amount that will be turning to cash. 2) Sales Returns and Allowances is a contra revenue account that is associated with the revenue account Sales. If the balance in this contra account is a debit of $3,000 and the Sales account has a normal credit balance of $400,000, the net sales are $397,000. The contra account enables the company’s management to see that its customers found $3,000 of the $400,000 of sales to be unacceptable. what does this mean? I don’t understand the whole concept of contra account. an someone explain in detail, and also these examples ?
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