Question

1)Businesses often create a provision for doubtful debts. i) Of which concept (or convention) is this an example? Explain your answer. ii) What is the purpose of creating a provision for doubtful debts? iii) How might the amount of a provision for doubtful debts be calculated?

Answer 1

1 convention of conservatism. This principle state that the situation of uncertainty, the business transactions should be recorded in such a way that profit and asset are not over stated and losses and liability are not understated. 2.The provision for doubtful debt is an estimated amount of bad debt, which arise from accounts receivable, but not yet collected from the debtors. The main purpose of creating provision for doubtful debt is created to reduce the account receivable 2.The provision for doubtful debt is created on past experience, usually which is certain percentage of of sundry debtors. The amount required for doubtful debt is kept by charging the amount to the profits and loss account. The journal entry is. Profit and loss accounts. Dr. To. Provision for doubtful debt Accounts. The double effects are. 1.It is shown in the debt side of the profit and loss account. 2. It is deducted from debtor in the balance sheet