Which account reduces a related account on a financial statement?

A contra account is designed specifically to reduce the balance of a related account on the financial statements. For instance, in the case of accounts receivable, the contra account may be "allowance for doubtful accounts." This account reflects the estimated amount of uncollectible accounts, thereby reducing the net accounts receivable figure reported on the balance sheet.

The presence of the contra account provides a clearer picture of the financial position by recognizing potential losses while maintaining transparency regarding the gross amount. By subtracting the amount in the contra account from its related account, stakeholders can see a more accurate representation of the collectible receivables.

In contrast, a controlling account maintains a summary balance for a group of subsidiary accounts, rather than reducing the balance of another account. A subsidiary ledger contains detailed information related to a controlling account, while the general ledger is the primary accounting record that encompasses all accounts. These alternatives serve different purposes and do not offer the same functionality as a contra account in terms of reducing a related account's balance.