AIPB Mastering Correction of Accounting Errors Practice Test 2025 – Comprehensive All-in-One Guide to Exam Success!

The correct answer is Dividends Declared because it directly reduces the total amount of retained earnings reported in the equity section of the balance sheet. When dividends are declared, they represent distributions of profits to shareholders, which decreases the retained earnings as the company is distributing a portion of its accumulated profits. This account is not a traditional asset or liability but serves to track the amount that will be paid out to shareholders and reflects a reduction in the company’s retained profits.

In contrast, Treasury Stock is also a contra account but specifically related to equity, as it represents the company’s own shares that have been repurchased and reduces total shareholders’ equity. Yet, it does not affect retained earnings directly. Discount on Bonds Payable is associated with liabilities and reflects a reduction in the carrying value of bonds issued, not affecting retained earnings. Sales Returns and Allowances is an income statement account that reduces sales revenue, impacting net income and, subsequently, retained earnings, but is not recorded as a direct contra account to retained earnings. Thus, Dividends Declared uniquely fits the description of a contra account specifically affecting retained earnings.