An estimated allowance set aside in the books to account for receivables that are unlikely to be collected, also called allowance for doubtful accounts.
Bad Debt Provision (or Provision for Doubtful Debts) is an accounting estimate created to reflect the expected credit losses on accounts receivable. Under Ind AS 109, companies must use the Expected Credit Loss (ECL) model, recognizing potential losses before they actually occur. The provision is created by debiting bad debt expense and crediting the allowance account (contra-asset). Methods include: percentage of sales, percentage of receivables, and aging schedule method. The provision reduces the net realizable value of receivables on the balance sheet and impacts profit through the expense.
Total AR: ₹50,00,000. Using aging method: Current (₹30L × 1% = ₹30,000) + 31–60 days (₹10L × 5% = ₹50,000) + 61–90 days (₹5L × 15% = ₹75,000) + 90+ days (₹5L × 40% = ₹2,00,000) = Total provision: ₹3,55,000.
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Bad debt provision is the balance sheet allowance (accumulated estimate). Bad debt expense is the P&L charge to increase or adjust the provision. When an actual bad debt occurs, it's written off against the provision, not directly to expense.
Under Section 36(1)(viia), banks and financial institutions can deduct provisions. For other businesses, actual bad debts written off are deductible under Section 36(1)(vii), but the provision itself is generally not deductible — only the write-off is.
Money owed to a business that is unlikely to be collected and is written off as an expense, reducing both accounts receivable and profit.
Money owed to a business by its customers for goods or services delivered but not yet paid for.
A report that categorizes accounts receivable or payable by the length of time invoices have been outstanding, typically in 30-day buckets.
A liability of uncertain timing or amount recognized in the financial statements when a present obligation exists and a reliable estimate can be made.
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