Answer
The theoretical justification revolves around the matching principle. This accounting principle requires expenses to be recognized against the corresponding revenue which calls for a recognition of the element of bad debts for receivables that might never materialize. Moreover, accounts must be stated at fair and true values and when it comes to receivables, the allowance method ensures that there is a provision for the risk of not collecting owed amounts.
Work Step by Step
Provision for doubtful accounts falls under IFRS 9 & 15.
