What is the type of account and normal balance of the Allowance for Doubtful Accounts?

• A. Contra-asset account with a credit balance
• B. Asset account with a debit balance
• C. Liability account with a credit balance
• D. Revenue account with a credit balance

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'Allowance for Doubtful Accounts': This account is used to estimate the portion of accounts receivable that may not be collectible. It is a contra-asset account, meaning it reduces the value of a related asset account (Accounts Receivable).
2. Review the normal balance of a contra-asset account: Contra-asset accounts typically have a credit balance, which is opposite to the normal debit balance of asset accounts.
3. Analyze the options provided: The correct type of account and normal balance for 'Allowance for Doubtful Accounts' is a contra-asset account with a credit balance. This aligns with its purpose of offsetting the Accounts Receivable balance.
4. Eliminate incorrect options: An asset account with a debit balance is incorrect because 'Allowance for Doubtful Accounts' is not a regular asset account. A liability account with a credit balance is incorrect because this account does not represent a liability. A revenue account with a credit balance is incorrect because this account is not related to revenue.
5. Conclude the correct answer: Based on the analysis, the correct classification is 'Contra-asset account with a credit balance.' This reflects its role in financial accounting and its normal balance type.