Final answer:
Bad and doubtful debts are amounts owed to a business that may not be fully collected. Recording them upholds the principle of conservatism and provides a more accurate representation of a company's financial position. To ensure accuracy, businesses can implement strict credit policies and maintain detailed records of customer transactions.
Step-by-step explanation:
Bad and doubtful debts refer to the amounts owed to a business that may not be fully collected or are unlikely to be collected in the future. When recording bad debts, they are typically written off as an expense on the income statement and deducted from the accounts receivable on the balance sheet. Doubtful debts, on the other hand, are recorded as an estimate of potential bad debts based on past experience and industry standards.
Recording bad and doubtful debts upholds the principle of conservatism in accounting, which states that businesses should be cautious in recognizing and reporting assets and revenues. It ensures that financial statements provide a more accurate representation of a company's financial position by accounting for potential losses due to non-payment by customers.
However, recording bad and doubtful debts can breach the principle of prudence if done incorrectly or without proper justification. It is essential to have a systematic process for assessing and identifying bad debts, such as analyzing customer payment history and considering economic conditions.
To ensure accuracy in recording bad and doubtful debts, businesses can implement strict credit policies, conduct regular credit checks on customers, and maintain detailed records of customer transactions and payment histories. They can also use financial ratios, such as the bad debt ratio, to monitor the level of bad debts and make adjustments if necessary.