Definition. A provision for doubtful debts is an amount set aside for customer invoices that may not be paid. It reduces trade debtors to the amount the business realistically expects to collect, and is also called a bad debt provision or allowance for doubtful debts.
Where it sits in the accounts. The charge goes to the profit and loss account as an expense. On the balance sheet, the provision is deducted from trade debtors, so debtors are shown net under current assets.
A design agency has £80,000 of trade debtors at its year end. One £4,000 invoice is 120 days overdue and the client is struggling, so the agency provides for it in full.
The balance sheet shows trade debtors of £76,000 (£80,000 less £4,000). If the client later pays, the provision is released back to profit.
It is netted off trade debtors under current assets, not shown as a liability.
A doubtful debt might still be paid, so it is provided for. A bad debt will not be paid and is written off completely.
A specific provision against identified debts is usually deductible for corporation tax. A general percentage provision usually is not.
Related terms: Bad debt · Trade debtors · Credit terms · Credit sale