PRC-1 · Chapter 5 · Question 52 of 100
What is the primary accounting concept that justifies the creation of an 'Allowance for Doubtful Debts' before a specific customer officially defaults?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Prudence Concept
Explanation
The prudence concept allows and requires a business to record an allowance for doubtful debts to ensure that assets (receivables) are not overstated, even if the actual loss has not yet occurred.
More Bad and Doubtful Debts MCQs
- Q54How is the 'Allowance for Doubtful Debts' account fundamentally classified within the general ledger?
- Q55At year-end, 'Alpha Corp' requires a closing allowance for doubtful debts of Rs. 25,000. The opening balance of the allowance account was…
- Q56If the required closing allowance for doubtful debts is Rs. 12,000, but the opening balance was Rs. 20,000, what is the net impact of the…
- Q57An irrecoverable debt of Rs. 5,000 that was formally written off in the previous year is unexpectedly paid by the customer via cheque…
- Q58What is the specific difference between a 'Specific Allowance' and a 'General Allowance' for doubtful debts?