How is the provision for doubtful debts created?
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How is the provision for doubtful debts created?
One way in which the provision for doubtful debts is created is through a general provision. This uses a simple or fixed percentage of trade receivables or debtors. For example a 2% of the total trade receivables or debts is taken as the provision. Another way in which the provision for doubtful debts is created is through a sliding scale provision. This is where a higher percentage is applied for older debts. For example the percentage increases after a certain amount of days. This could be a 2% provision for debts less than 90 days. It could then increase to 5% if the debt is between 90 and 120 days. Then you could get a further increase up to 10% if the debt goes over 120 days. Another way in which the provision for doubtful debts is created is through a combination of specific and a general provision. This will come in in two parts. Firstly a provision to a specific debt of a customer and secondly a simple percentage is then applied on the remaining debt or trade receivables.
