Provision for Doubtful Debts
An accounting estimate setting aside part of receivables expected not to be paid, before any debt is formally written off.
What it is
A provision for doubtful debts, also called an allowance, is an estimate of receivables that may not be collected. Rather than waiting until a debt is confirmed as a bad debt, the business recognises the likely loss in advance, giving a more honest view of the value of its ledger.
How it is set
The provision may be specific, naming particular doubtful accounts, or general, applying a percentage to ageing bands. It is a non-cash adjustment that reduces profit and the carrying value of receivables. Review it against your aged receivables each reporting period to keep it realistic.
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