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Question

Why is it necessary to create a provision for doubtful debts at the time of preparation of final accounts?

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Solution

Generally bad debts get recorded and charged to profit and loss account in an accounting year which is different from the accounting year in which credit sale have been made. To ensure proper matching of revenues and expenses and calculate true profit, it is necessary that expenses on account of non-recovery of amount from debtors are treated as expenses in the period in which credit sales are made.
As the exact amount of bad debts cannot be calculated at the time of sale, it is suggested that provision for doubtful debts is created in the year of sale and charged to profit and loss account of that year.

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