What is the provision for doubtful debts?
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What is the provision for doubtful debts?
The provision for doubtful debts is an estimation. It is the expected amount of debt owed by customers or trade receivables that the business believes may never be paid back and will eventually turn into bad debts or irrecoverable debts. It is very important to note that the provision for doubtful debts and bad debts or irrecoverable debts are two separate concepts and should not be confused as being the same thing. A bad debt or irrecoverable debt relates to the debt of a specific customer. This is more factual and accurate because the business has gone through a process to identify and then accept that no payment will be received from either a certain customer or group of customers. On the other hand the provision for doubtful debts is an estimate. It relates to a general proportion of the total debt owed by customers that the business expects to turn into bad debts or irrecoverable debts. This could be a simple percentage of the total debt to work out the provision and could be based on several factors like historical trends of customers not paying back the business and turning into bad debts or irrecoverable debts.
