Question

(b) Why is provision for doubtful debts created? How is it shown in the Balance sheet? Explain (10)

Answer 1

The reason for a bad debt provision is that, under the matching principle, a business should match revenues with related expenses in the same accounting period. Doing so shows the full effect of a billed sale transaction in a single accounting period.



A business typically estimates the amount of bad debt based on historical experience, and charges this amount to expense with a debit to the bad debt expense account (which appears in the income statement) and a credit to the provision for doubtful debts account (which appears in the balance sheet).