Question

Specify two accounting principles applied by maintaining a provision for doubtful debts:

a. Matching principle and Materiality principle
b. Revenue recognition principle and Consistency principle
c. Conservatism principle and Going concern principle
d. Historical cost principle and Objectivity principle

Answer 1

The provision for doubtful debts is aligned with the matching principle, which matches expenses with related revenues, and the conservatism principle, which anticipates potential losses but not gains.

Step-by-step explanation:

The provision for doubtful debts is maintained by applying certain accounting principles, specifically, the matching principle and the conservatism principle. The matching principle stipulates that expenses should be recognized in the period they are incurred regardless of when the payment is made, and should be matched with the revenues they helped generate. In the context of doubtful debts, this means a business should estimate and record the expense of potential bad debts in the same period it records the sales revenue these debts relate to.

The conservatism principle dictates that a business should provide for all expected losses but not for potential gains. By creating a provision for doubtful debts, a company is acknowledging that not all of its receivables may be collectible and is therefore conservatively reporting its assets.