Provision for Doubtful Debts Ensures Accurate Financial Reporting

Steps:

• Identify purpose: Provision accounts for potential bad debts from receivables.
• Review statements: Assume 1 (ascertain true profit), 2 (true financial position), 3 (legal requirement), 4 (tax reduction).
• Match to accounting principle: Conservatism requires estimating losses to avoid overstating assets/profits.
• Select option: A covers core reasons 1 and 2.

Why A is correct:

• Matches prudence concept in accounting, requiring provisions for foreseeable losses to reflect realistic profit and balance sheet.

Why the others are wrong:

• B includes irrelevant 3 and 4; no legal mandate or tax benefit drives this provision.
• C omits key profit impact (1) and adds unneeded legal (3).
• D ignores profit/financial accuracy (1,2) and focuses on non-purposes.

Final answer: A