Login

Welcome, Guest. Please login or register.

March 29, 2024, 04:25:48 am

Author Topic: Allowance For Doubtful Debts - Verifiability & Faithful Representation  (Read 2191 times)  Share 

0 Members and 1 Guest are viewing this topic.

Seamus Wong

  • Guest
Hello,

Could someone please show me how to answer this question:

'The creation of an Allowance for Doubtful Debts causes a conflict between the demands of Verifiability and Faithful Representation' Do you agree? Discuss

Here is my Answer, but I don't really know how to 'discuss' the issue... Any feedback would be greatly appreciated

Yes, the statement is true. The allowance for doubtful debts recorded on the balance sheet is not traceable to a source document and thus its accuracy cannot be supported - i.e. it does not meet the demands of verifiability. However, it is an account that should be reported by every firm who sells on credit, since there is always a degree of risk surrounding repayments from Accounts Receivable. Therefore, the need for accounting reports to accurately reflect the true financial position of a business is met through the creation of the allowance for doubtful debts, upholding faithful representation (which outweighs the demands of Verifiability in this scenario).

Thanks

dunno2012

  • Adventurer
  • *
  • Posts: 20
  • Respect: 0
+2
Hello,

Could someone please show me how to answer this question:

'The creation of an Allowance for Doubtful Debts causes a conflict between the demands of Verifiability and Faithful Representation' Do you agree? Discuss

Here is my Answer, but I don't really know how to 'discuss' the issue... Any feedback would be greatly appreciated

Yes, the statement is true. The allowance for doubtful debts recorded on the balance sheet is not traceable to a source document and thus its accuracy cannot be supported - i.e. it does not meet the demands of verifiability. However, it is an account that should be reported by every firm who sells on credit, since there is always a degree of risk surrounding repayments from Accounts Receivable. Therefore, the need for accounting reports to accurately reflect the true financial position of a business is met through the creation of the allowance for doubtful debts, upholding faithful representation (which outweighs the demands of Verifiability in this scenario).

Thanks

You answer is good apart from the very last point about "outweighing". Never in theory questions say that this characteristics outweighs that. I would say that you could refer to relevance and talk about decision making because the creation of the allowance heavily impacts the decision making of the users of the report.

accountboi

  • Fresh Poster
  • *
  • Posts: 4
  • Respect: 0
Re: Allowance For Doubtful Debts - Verifiability & Faithful Representation
« Reply #2 on: November 01, 2019, 04:57:27 pm »
+1
An allowance for doubtful debts is an entry made on the presumption that not all customers who have purchased inventory on credit will settle the amount they owe to the business. Businesses should recognise that events happen that will cause these customers to not pay the amount owed or the full amount. In order to better match the expenses incurred against revenues earned and to faithfully represent the real-world economic events as they apply to the business, the business can use past experience and allocate a specific amount of Accounts Receivable that is unlikely to pay. Hence, the Accounts Receivable is not being overstated in the Balance Sheet and is portrayed in a complete and neutral manner. However, an allowance for doubtful debts account cannot be supported by a source document as it involves estimates. This means reports may not be prepared free from bias, resulting in an allowance for doubtful debts not upholding verifiability as independent observers may not reach a general consensus.