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Why is it necessary to create a provision for doubtful-debts at the time of preparation of final accounts? |
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Answer» The provision for doubtful-debts is created with the motive of minimizing the effect of actual loss caused by the bad-debts. The actual figure of the current year’s bad debts will be known in the next year with the realization of debtors. At that point of time, it will be known as to how many of the debtors have become bad. Thus, instead of waiting for the realization of debtors, we create a provision for doubtful-debts in order to cover the expected future loss associated with the debtors becoming bad. |
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