What is provision for bad debts in accounting?

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Jamison Kessler asked a question: What is provision for bad debts in accounting?
Asked By: Jamison Kessler
Date created: Sat, Mar 20, 2021 8:59 AM
Date updated: Mon, Aug 29, 2022 8:12 PM

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Provision for bad debts accounting

  • The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for Doubtful Accounts, or Allowance for Uncollectible Accounts. In this case, the account Provision for Bad Debts is a contra asset account (an asset account with a credit balance).

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The provision for bad debt is estimated each year at the end of the accounting period. This way the matching principle of accounting is followed and no GAAP are violated. The matching principle states that every entity must book its expenses that relate to the revenue it has generated.

Provision for bad debts is the estimated percentage of total doubtful debt that needs to be written off during the next year. It is nothing but a loss to the company which needs to be charged to the profit and loss account in the form of provision. It is done on the reason that the amount of loss is impossible to ascertain until it is proved bad.

The provision for bad debts could refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for Doubtful Accounts, or Allowance for Uncollectible Accounts. If so, the account Provision for Bad Debts is a contra asset account (an asset account with a credit balance).

Provisions for Bad Debts Account with the amount of anticipated bad debts. At the end of each subsequent financial year, the balance on provision for bad debts account is adjusted to the correct anticipated bad debts for the next year. It is important to note the provisions for bad debts account is used only to maintain a provision.

A bad debt provision is created with a debit to the bad debt expense account and a credit to the bad debt provision account. The bad debt provision account is an accounts receivable contra account, which means that it contains a balance that is the reverse of the normal debit balance found in the associated accounts receivable account.

The provision for the bad debt is an expense for the business and a charge is made to the income statements through the bad debt expense account.

“ Provision for doubtful debts or allowance for bad debts or un-collectible accounts state the proportion of trade receivables that the business expects, but may not be recovered”.

A bad debt provision allows the full amount of the invoice sent to the customer to remain on the trade debtors control account since no formal agreement has been made in regards to how much of it will be paid – no credit note has been raised and the VAT element is unaffected.

Bad debts are the account receivables that have been clearly identified as uncollectible in the present or future time. The account receivables are credited by the amount of bad debt. The debtors who have become bad debts are removed from the accounts by passing an entry for bad debt expenses. Doubtful debts cannot be specified with a surety.

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