Provision for bad debts

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Accepted Answer

Provision for bad debts is an estimated amount set aside by a company to cover potential losses from customers who may not pay their debts.

Provision for bad debts is a common practice in accounting to ensure that a company's financial statements accurately reflect the potential losses from unpaid debts.
The provision is based on an estimate of the percentage of outstanding debts that are likely to go bad.
The provision is recorded as an expense on the income statement and as a liability on the balance sheet.
The provision is adjusted periodically based on changes in the company's credit policies and the overall economic environment.
For example, if a company has $100,000 in outstanding debts and estimates that 5% of those debts will go bad, it would set aside a provision of $5,000.
If a customer later defaults on a debt, the company would reduce the provision and recognize the loss as an expense.
Provision for bad debts is important for investors and creditors to understand a company's potential risks and liabilities.

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