Question on Provision for Bad Debt

nephilist

I'm trying to get my head around how the provision for bad debt works in the P&L account and just can't. From what I understand both provision for bad debt and bad debt themselves go in the expenses. So if I make a provision of €1000 and then have bad debts of €1000 I have a total expense of €2000 in my P&L?

This honestly doesn't make sense to me. If my bad debt expense is anything over and above what I have provided for then that would seem reasonable but the provision for bad debt just seems to be some figure drawn from thin air and put in as an expense if I'm claiming for bad debts written off anyway.

Can anyone explain it in layman's terms for me please. Ty

pmcc123

nephilist wrote: »

I'm trying to get my head around how the provision for bad debt works in the P&L account and just can't. From what I understand both provision for bad debt and bad debt themselves go in the expenses. So if I make a provision of €1000 and then have bad debts of €1000 I have a total expense of €2000 in my P&L?

This honestly doesn't make sense to me. If my bad debt expense is anything over and above what I have provided for then that would seem reasonable but the provision for bad debt just seems to be some figure drawn from thin air and put in as an expense if I'm claiming for bad debts written off anyway.

Can anyone explain it in layman's terms for me please. Ty

If its a specific provision then, you would write the debt off against the provision.

A bad debt provision is like any other, its just offset against debtors. So in a typical tb there is a "bad debt provision" a/c.

Can give the dr and cr if you like.

Jadaol

hi,

if you think there might be a bad debt, you DR the bad debt expense account €1,000 and CR the bad debt provision account €1,000 in the balance sheet.

when you know it's bad, you DR the bad debt provision account €1,000 and then CR the debtor account €1,000

The bad debt is expensed only once, the the provision is held in the balance sheet until it's eventually written off.

Alternatively, if you know for sure it's bad as of now, you DR the bad debt expense account and CR the debtor account and you do not use a bad debt provision account in this instance. The provision account is only used if you're not completely certain it'll be written off

Cookie_Monster

you can look at it as the BD provision is for future bad debt, where as the BD itself is current and therefore separate. If you incur a future BD you write it off against the provision you created rather than directly to expenses essentially saving you from recording it directly against expenses at that future date.

HeinekenTicket

Some basic explanatory notes on irrecoverable debts...they are my own. PM me if they require clarification.