What is meant by provision for doubtful debts

Question

Accepted Answer

Provision for doubtful debts is an accounting practice where a company sets aside funds to cover potential losses from customers who may not pay their debts.

Provision for doubtful debts is a financial provision made by a company to account for potential bad debts.
It is an estimate of the amount of money that a company expects to lose from customers who are unlikely to pay their debts.
The provision is created by recording an expense in the company's financial statements, which reduces the company's profit.
The provision is based on historical data, creditworthiness of customers, and economic conditions.
It helps in presenting a more accurate picture of a company's financial position and performance.
For example, if a company has $10,000 in accounts receivable and estimates that 5% of the amount will not be collected, it will create a provision of $500.
If a customer defaults on their payment, the company can then write off the bad debt against the provision.
The provision for doubtful debts is reviewed regularly and adjusted as necessary based on changes in circumstances.

Accepted Answer

Provision for doubtful debt is the estimated amount of bad debt that will arise from accounts receivable that have been issued but not yet collected. It is a contra asset that reduces the balance of receivables and is shown on the liability side of a balance sheet. It is a counter account to accounts receivable and is shown underneath it in the financial statements. It is used under accrual basis accounting to recognize an expense for probable bad debts as soon as invoices are issued.

What is meant by provision for doubtful debts

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