Maintaining a provision for doubtful debts applies the accruals (matching) principle because it ensures that the expected loss from credit sales is recorded in the same accounting period as the revenue those sales generated.

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2. When goods are sold on credit, the business recognizes the sales revenue immediately. However, some customers may fail to pay. Instead of waiting until a debt actually becomes bad in a future period, the business estimates the amount that is likely to be uncollectible and records it as a provision in the current period.

This matches:

• Revenue earned from credit sales, with
• The expected expense of doubtful debts arising from those sales.

As a result:

• The profit for the period is not overstated, because the expected loss is included as an expense.
• Trade receivables are shown at their expected recoverable amount, giving a more realistic value of the asset.

Exam answer (for you to score 2–3 marks):

A provision for doubtful debts applies the accruals (matching) principle by charging the estimated bad debt expense to the same accounting period in which the related credit sales revenue was earned. This ensures that income and the associated expense are matched, giving a more accurate profit for the period.

Maintaining a provision for doubtful debts is an application of the principle of prudence because it recognizes expected losses before they actually occur, rather than waiting until a debt becomes definitely irrecoverable.

The prudence principle requires accountants to:

• Avoid overstating assets and profits.
• Recognize probable losses as soon as they are anticipated.

1. By creating a provision for doubtful debts, the business estimates the amount of receivables that may not be collected and records this as an expense. This reduces both profit and the value of trade receivables to more realistic amounts.

Exam answer (for you to score 2–3 marks):

A provision for doubtful debts applies the principle of prudence by recognizing the estimated loss from customers who may not pay before the loss actually occurs. This prevents profits and trade receivables from being overstated in the financial statements.