Question

a) What is a contra account? Give one example of a contra account.

b) How may financial statements assist the users of the financial statements?

Answer 1

Answer to (a)

A contra account is an account having a balance which is opposite of normal balance. It is used in general ledger to reduce the value of a related account when the two accounts are netted together.

Example: Accumulated depreciation is a contra account because the credit balance of the account is contra to the debit balance for an asset account.

A contra entry is recorded when debit and credit affects the same account which results in zero effect to the account.
Journal entry :

Depreciation expense Dr. xxx

To Accumulated depreciation. xxx

( Being depreciation charged to accumulated depreciation account)

Answer to (b)

The users of the financial statements include owners, investors, customers , suppliers , employees, management, Government and general public. Financial statements helps the users to obtain information about company's revenue, expenses, debt etc. It also helps to identify the finacial solvency of the company and the ability of the company to meet its short term and long term financial obligations. Financial statement provide the users with the information of knowing the finacial position and performance of the company which helps the users in decision making.It gives an overall view of the operating activities of the company.