explain provision for bad debts
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The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for Doubtful Accounts, orAllowance for Uncollectible Accounts. In this case, the account Provision for Bad Debts is a contra asset account (an asset account with a credit balance).
paul03:
I don't under
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Bad debt is a debt that cannot be recovered.
A bad debt is a monetary amount owed to a creditor that is unlikely to be paid and, or which the creditor is not willing to take action to collect because of various reasons, often due to the debtor not having the money to pay.
When we become aware that someone won't pay us (that the debt has become 'bad')
The provision for bad debts is not the same as bad debts.
The provision for bad debts is an estimate of the debts owed to us that will go bad in the future. We record this future loss of debts as soon as we are aware that we will definitely lose money in the future.
For example, let's say that at the end of the year we have R200,000 in debtors control. We expect 2% of debts owed to us to go bad in future. This amounts to R4,000 of our current debts. We're pretty sure we will lose this amount in the future. So we record this provision.
Hope it helps
A bad debt is a monetary amount owed to a creditor that is unlikely to be paid and, or which the creditor is not willing to take action to collect because of various reasons, often due to the debtor not having the money to pay.
When we become aware that someone won't pay us (that the debt has become 'bad')
The provision for bad debts is not the same as bad debts.
The provision for bad debts is an estimate of the debts owed to us that will go bad in the future. We record this future loss of debts as soon as we are aware that we will definitely lose money in the future.
For example, let's say that at the end of the year we have R200,000 in debtors control. We expect 2% of debts owed to us to go bad in future. This amounts to R4,000 of our current debts. We're pretty sure we will lose this amount in the future. So we record this provision.
Hope it helps
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