The likely amount of the discount to be allowed is debited to the Profit and Loss Account and credited to the Provision for Conservatism Discount Account. The balance in the latter account is deducted from book debts (Debtors) in the Balance Sheet and is carried forward to the next year.

Concept of Provision for Discount

The provision for discount is a concept in accounting that allows for the reduction in the selling price of goods or services to customers. This reduction is usually given as an incentive for customers to pay their bills early or to encourage them to buy more from the seller. To account for this, a provision is made for the discount that is expected to be given to customers.

Conservatism

The principle of conservatism in accounting requires that losses and expenses should be recognized as soon as they are probable, while gains and revenues should only be recognized when they are certain. In the case of provision for discount, the conservatism principle requires that the provision should be made as soon as possible to avoid any possible losses that may arise from not accounting for the discount.

Matching

The matching principle in accounting requires that expenses should be matched with the revenues they help to generate. In the case of provision for discount, the matching principle requires that the provision should be made at the time of sale or revenue recognition to ensure that the correct amount of revenue is recognized and that the expenses are matched correctly.

Both (a) and (b)

The provision for discount is made due to both the conservatism and matching principles in accounting. The conservatism principle requires that the provision be made as soon as possible to avoid any potential losses, while the matching principle requires that the provision be made at the time of sale or revenue recognition to ensure that the expenses are matched correctly.

Materiality

The concept of materiality in accounting requires that only significant items should be recorded in the financial statements. The provision for discount is a material item and should be recorded in the financial statements as it can have an impact on the financial results of the company. However, the amount of the provision should be based on reasonable estimates and should not be overstated.

Option c