What is Provision for Doubtful Debts?


Providing for Doubtful Debts

Any business selling goods on credit may suffer occasional loss as a result of customers' failure to settle outstanding debts.  A provision for doubtful debts arises out of this situation.  In many businesses there is virtual certainty that some debtor accounts will turn out to be bad, but the amount cannot be quantified with certainty. In keeping with the prudence concept, profits must be reduced by an estimated value of debts which may not be settled. To take care of this, normally a certain percentage of debtors' accounts is taken to be doubtful of collection.  This amount is charged against profits through the creation of a doubtful debts expense account.

Because it is not intended to write off these debtors (at the moment the amounts are only doubtful debts not bad debts) the credit entry is not passed through the debtors' account, instead it is credited to a Provision for Doubtful Debts account.  The balance of this account is deducted from the debtors’ figure in the balance sheet to arrive at net debtors. Provision for Doubtful Debts account is therefore, like the Accumulated Depreciation account a contra asset account

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