Which accounting concept is related to bad and doubtful debts?

The accounting concept most closely related to bad and doubtful debts is prudence. This concept emphasizes that accountants should be cautious and realistic in their financial estimations, ensuring that liabilities and expenses are not understated. In the context of bad debts, the prudence concept dictates that businesses should recognize the possibility of non-collectible accounts by setting aside provisions for doubtful debts. This is done to avoid overstating assets and income, reflecting a more accurate financial position.

Materiality, on the other hand, refers to the significance of financial information to decision-makers. While it plays a role in determining what needs to be disclosed in financial statements, it does not directly relate to the recognition and treatment of bad debts.

Cash flow relates to the movement of cash in and out of the business and is not specifically connected to the treatment of bad debts in accounting records.

Thus, the correct understanding is that the treatment of bad and doubtful debts aligns primarily with the prudence principle, while materiality is a broader concept that could relate to various aspects of financial reporting. Therefore, the combination of both prudence and materiality being highlighted acknowledges the approach taken towards bad debts in ensuring accurate reporting and decision-making.