An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a(n): Select one: a. Contra account. b. Accrued revenue. c. Adjunct account. d. Intangible asset.
The correct answer and explanation is:
Correct Answer: a. Contra account.
A contra account is a type of account that is used in accounting to reduce the value of a related account. It has a balance that is opposite to the normal balance of the account it is linked to. If the related account is an asset, which normally has a debit balance, the contra account would have a credit balance. Conversely, if the related account is a liability or equity account, which normally has a credit balance, the contra account would have a debit balance.
The purpose of a contra account is to show the net amount after accounting for adjustments such as depreciation, allowances, or discounts. For example, the Allowance for Doubtful Accounts is a contra asset account linked to Accounts Receivable. While Accounts Receivable shows the total amount owed by customers, the allowance account reduces it to reflect the amount that is actually expected to be collected.
Another common example is Accumulated Depreciation, which is a contra account to Property, Plant, and Equipment. This account shows the total depreciation that has been recorded over time, and when subtracted from the asset account, it provides the net book value of the asset.
Contra accounts are important in presenting financial statements more accurately. They help users see not only the total figures but also the adjustments that affect those figures. Without contra accounts, financial information would be less clear and might overstate assets or revenues.
To summarize, a contra account offsets the balance of a related account with an opposite normal balance. It enhances transparency and provides more accurate financial reporting by showing the net amounts on the financial statements.