1. What is the accounting concept (or convention) involved in preparing a provision for doubtful debts account. Explain your answer.

Matching concept is used in preparing a provision for doubtful debts. This is because an expense can be recognized for probable bad debts as soon invoice issued to the debtors , rather than waiting for which outstanding debts is unlikely to be collected. Hence, the provisions of doubtful debts are reported in the early reporting stage itself. The second accounting concept involved in preparing provision for doubtful debts is prudence. The function of prudence is not to overstate profits, revenues or assets and not to understate losses, expenses and liabilities. Prudence takes place in situation of uncertainty as part of ensuring the reliability information. Prudence requires allowance to be created to recognize potential loss.

2. Explain the effect on the financial performance and financial position of the business entity, if there is no such provision in accounting.

If there is no bad debts provision in accounting, it will be assumed that there are no bad debts in the business.This means that all the debts owed by the debtors are likely to be paid to the business. Therefore, the profit will be overstated causing company to have more profit in the financial performance which is against the prudence law. However, there will be no change in the balance sheet as there will be no change of assets or liabilities.

3. What is the purpose of creating a provision for doubtful debts?Provision of bad debts provides for future bad debts resulted from current years sales as a prudent precaution by the business. It is the estimated amount of bad debt that might occur from accounts receivable that have been issued but likely irrecoverable. The business will be more likely to to avoid claiming profits which subsequently fail to materialize because some debts turn out to be bad.

The Allowance for Doubtful Accounts is used when Bad Debt Expense is recorded prior to knowing the specific accounts receivable that will be uncollectible he provision is used under accrual basis accounting, so that an expense is recognized for probable bad debts as soon as invoices are issued to customers, rather than waiting several months to find out exactly which invoices turned out to be uncollectible

Thus, the net impact of the provision for doubtful debts is to accelerate the recognition of bad debts into earlier reporting periodsThe provision for doubtful debts is the estimated amount ofbad debtthat will arise from accounts receivable that have been issued but not yet collected.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). The organization should make this entry in the same period when it bills a customer, so that revenues are matched with all applicable expenses (as per the matching principle).Prudence requires that an allowance be created to recognize the potential loss arising from the possibility of incurring bad debts