What Is The Difference Between Provision For Bad Debt And Reserve For Doubtful Debts And Their Accounting Implications? Please Answer This Query Because It Creates Confusion

Question

What Is The Difference Between Provision For Bad Debt And Reserve For Doubtful Debts And Their Accounting Implications? Please Answer This Query Because It Creates Confusion

4 Answers

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Answer 1

Provision for bad debt is about creating a provision to adjust a known debt. On the other hand, a reserve for doubtful debt signifies a provision which is created for unknown debts that may arise in the future. Provision is nothing but a charge against your profit. Alternatively, a reserve is an appropriation of profit.

Answer 2

Provision for bad debt, reserve for doubtful debts or allowance for doubtful accounts are all the same. It's a contra account created for accounts receivable that is due but not yet paid. If the receivable has been long overdue, it may be written off, depending on company's policies how long before receivables could be written off.

Answer 3

Technically, a provision is an expense and a reserve (properly referred to as an allowance) is a contra-asset. You debit an expense provision (Income Statement Account) and credit an allowance for bad debts (Balance Sheet account).

Another example: Debit Provision for Income Tax and Credit Income Taxes Payable.

Answer 4

Provision for bad n doubtful debts and reserve for doubtful debts are all same. Accounting implications is if there is an increase in the provision for bad debts then we show it in the debit side of the P/L account and vice versa. This amount of provision is then deducted in the Balance Sheet from the debtors.