What is a provision for bad debts?
submitted by innocent

homeflyskillet

That is a fund, essentially, for bad debts. It's an estimated amount that you set aside to cover your potential losses of income from customers. That will reduce the amount you can recover from accounts receivable.

Your provision for bad debts is considered an expense on the income statement. It reduces the carrying amount of receivables on the balance sheet. Setting this money aside beforehand helps you keep your financial statements more realistic.

ruben_sammy_destroyer

A provision for bad debts is basically a safety net for bad debts. A company creates a fund to cover money it might not get back from customers who don't pay their bills.

Since it's hard to know exactly who will default, companies have to estimate and set aside some funds to account for these potential losses. It helps show a clearer picture of what the company's assets are really worth. It keeps your income from taking weird and unexpected dips, because when a customer doesn't come through with a payment, you can just cover it from your rainy day account, which is your provision for bad debts account.