Provision for Doubtful Debts

What is Provision for Doubtful Debts?

Provision for Doubtful Debts is an estimation of the amount of a company's accounts receivable that may become uncollectible. This provision is recorded as an expense on the income statement, and it allows companies to anticipate future losses due to customers defaulting on their obligations.

Short Description: An accounting allowance for accounts receivable that may not be collected.

• Purpose: To prepare financial statements that realistically reflect a company's collectible accounts.
• Calculation: Often based on historical data and analysis of specific debtors' circumstances.
• Balance Sheet Impact: It is a contra asset account that reduces the carrying value of accounts receivable.
• Financial Stability: Helps in understanding the risk associated with accounts receivable.

The provision ensures that a company's reported net income is not overstated by the inclusion of sales revenue that may never be realized. This accounting approach is essential for prudent financial management and regulatory compliance.