A provision for doubtful debts is an estimated amount set aside for the risk that some customers may not fully settle their accounts. It is deducted from trade receivables (debtors) on the balance sheet to give a more realistic view of the expected cash inflow.

• Example/Scenario: A retail company anticipates that a certain percentage of customers will default on their payments. If the total outstanding receivables are £100,000, and 5% are expected to be uncollectible, the company will set aside £5,000 as a provision for doubtful debts. This ensures that the financial statements accurately reflect the expected cash flow.