JE of Provision for doubtful debt and there treatment in financials

Question

Accepted Answer

Provision for doubtful debt is an estimation of the amount of bad debt that a company is likely to incur.

Provision for doubtful debt is a contra account to accounts receivable.
It is created by recording an adjusting entry at the end of each accounting period.
The amount of the provision is based on historical data and management's judgment.
It reduces the net value of accounts receivable on the balance sheet.
If the actual bad debt expense is less than the provision, the excess is reversed.
If the actual bad debt expense is more than the provision, additional provision is made.
The provision for doubtful debt is reported on the income statement as an expense.
It is also disclosed in the notes to the financial statements.
For example, if a company has $100,000 in accounts receivable and estimates that 5% will be uncollectible, it will create a provision for $5,000.
This will reduce the net value of accounts receivable to $95,000 on the balance sheet.

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