Provision for doubtful debts account is a which type of account real personal or nominal ? Plz Ans with explanation?

Question

Answer

Real account

Answer

Provision for Doubtful Debts Account

Provision for doubtful debts account is a nominal account in nature.

Explanation

Nominal Account: Nominal accounts are temporary accounts that are used to record revenues, expenses, gains, and losses. They are closed at the end of each accounting period. Provision for doubtful debts is created to account for the potential losses a company may incur due to customers defaulting on their payments. It is an estimated amount set aside to cover potential bad debts.

Significance of Provision for Doubtful Debts Account

Matching Principle: By creating a provision for doubtful debts account, a company follows the matching principle, which states that expenses should be recognized in the same period as the revenues they help to generate. This ensures that the financial statements accurately reflect the company's financial position.
Risk Management: The provision for doubtful debts account helps the company to manage the risk of bad debts by anticipating potential losses and setting aside funds to cover them. This allows the company to maintain a more accurate picture of its financial health.
Profit Recognition: By creating a provision for doubtful debts, the company can reduce its profits by accounting for potential losses. This helps in presenting a more realistic view of the company's profitability to stakeholders.

Conclusion

In conclusion, the provision for doubtful debts account is a nominal account that plays a crucial role in ensuring the accuracy and reliability of a company's financial statements. It helps in managing risks, following accounting principles, and presenting a true and fair view of the company's financial position.

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What is personal,Real and nominal account?

Reserve for bad debt is personal or real or nominal in nature?

What kind of accounts are typically not balanced but closed by transferring to the Profit and Loss Account?

When provision for doubtful debt account is credited which account is debited? A . Debtors account B. Bad debt account C. Profit and loss account D. None of the above?

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