Definition of Provision for Doubtful Debts
Some companies use Provision for Doubtful Debts as the name of the contra-asset account which is reported on the company’s balance sheet. Other companies use Provision for Doubtful Debts as the name for the current period’s expense that is reported on the company’s income statement.
If Provision for Doubtful Debts is the name of the account used for recording the current period’s expense associated with the losses from normal credit sales, it will appear as an operating expense on the company’s income statement. It may be included in the company’s selling, general and administrative expenses.
[However, if the expense is associated with extending credit outside of a company’s main selling activities, the credit loss will be reported as a nonoperating expense.]
Example of Provision for Doubtful Debts
Accounting textbooks avoid the use of the word “provision” and instead use the following terminology:
- The contra-asset account associated with accounts receivable will have the account title Allowance for Doubtful Accounts.
- The current period expense pertaining to accounts receivable (and its contra account) is recorded in the account Bad Debts Expense which is reported on the income statement as part of the operating expenses.
