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