Multiple choice

A provision is made for possible bad and doubtful debts out of current year's profits based on the convention of

  1. conservatism

  2. materiality

  3. consistency

  4. disclosure
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A Correct answer
Explanation

The provision of bad debts is made out of the current year's profits based on the convention of conservatism. This convention means that all the risks inherent in a business must be taken into account. If there is a possibility of loss, it should be taken into account at the earliest. So, there is a possibility that some amount may not be paid by debtors, therefore a provision is made for it to cover that loss.

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