00
Days
00
Hours
00
Minutes
00
Seconds
Sign Up to Our Webinar! 'Become a Pricing and Forecasting Maestro with GoProposal and Futrli'
Register Now

Introductory guide to the provision for doubtful debts

Read our introductory guide to creating a provision for doubtful debts and how to calculate it.

As a small business owner, you will inevitably be faced with clients not paying the money you are owed. Small businesses must account for this in their balance sheet to avoid serious financial problems as a result of bad debt. This is why we've compiled this guide to creating a provision for doubtful debts and how to calculate it.

Credit cards next to laptop
As a small business owner, you will inevitably be faced with clients not paying the money you are owed.

Provision for doubtful debts - explained

The provision for doubtful debts, often described as the provision for losses on accounts receivable or bad debt provision, describes the estimated amount of doubtful debt likely to be written off in a given period. It acts as an allowance for bad or doubtful debts. You can create either a specific or general allowance for bad debts. The former refers to specific debt that is likely to be doubtful due to eg financial problems, while the latter refers to a general percentage of accounts receivable that are estimated to need writing-off based on experience. It is advisable to include these figures on your business's balance sheet as it informs the overall financial state of your business.

The provision for doubtful debts, often described as the provision for losses on accounts receivable or bad debt provision, describes the estimated amount of doubtful debt likely to be written off in a given period.

Calculating the provision for doubtful debts

Usually, these calculations would be based on historic experience. When entering your allowance for doubtful debts, there’ll be two ledger accounts for the provision for doubtful debt and the provision for doubtful debt – adjustment. While the former refers to the allowance for accounts receivable to be written off, the latter refers to any changes made to this allowance. When creating or increasing a provision for doubtful debt, you do it on the ‘credit’ side of the account. When decreasing or removing the allowance, you do it on the ‘debit’ side. When encountering an account receivable that is unlikely to be paid, this gets eliminated against the bad debt provision. Such receivables can be logged in a journal entry that debits the provision for bad debts and credits the accounts receivable account.

Calculating debts
When entering your allowance for doubtful debts, there’ll be two ledger accounts for the provision for doubtful debt and the provision for doubtful debt – adjustment.

Example

Company X has a total of GPB 50,000 account receivables at the end of the year. It decides to create a provision for doubtful debts that will be 1% of the total receivables balance. You then calculate the provision for bad debts as follows: GPB 50,000 x 1% = GPB 5,000. This would be entered in a journal like this:

Account$DrCr Provision for doubtful debts - adjustment5,000X  Provision for doubtful debts5,000  X

By the end of the next year, Company X's total receivables amount to GPB 70,000. They, therefore, need to increase the provision for doubtful debts to GPB 7,000 (GPB 70,000 x 1% = GPB 7,000). In their records, the adjusted allowance will look like this:

Account$DrCr Provision for doubtful debts - adjustment7,000X  Provision for doubtful debts7,000  X

Watch the Webinar Recording

Start Your Free Trial

Let informed predictions and powerful reporting guide your business. Be ahead of the curve with Futrli.

Get business advice here

Our blog holds tips, how to’s and general business advice.

Futrli News

Futrli's February 2024 Release

This is some text inside of a div block.

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat.

Futrli News

Futrli's February 2024 Release

Accountants

3 Apps to beat accounting blues and scale your firm

Chris Downing catches up with three accounting app innovators to discuss the apps that they have developed that directly help accountants.

Accountants

Where most prediction software falls short

Tread carefully when looking for prediction software. Find out how to dig deeper into your predictions with the tools that count.

Small Businesses

Cash is King! 4 ways to keep your cash flow healthy.

Cash flow is essential to your business’ survival. Read our top 4 tips for taking control of your cash flow.

Small Businesses

10 Common Cash Flow Forecast Hurdles

If there’s one thing that all small and medium-sized enterprises should prioritise, it’s their cash flow. Read on to find out the top 10 most common issues.

Accountants

Empowering Accountants: How to Embrace Uncertainty with Futrli

The future is far from certain. Find out how Futrli helps accountants wade their way through murky, grey, “This might happen”-type scenarios.

Small Businesses

Inflation affecting your hospitality business? Take back control with these three steps.

Acting quickly is key to ensure you can ride out the incoming storm. Find out more in this article.

Small Businesses

Why cash flow forecasting helps businesses survive downturns in trade

Learn how cash flow forecasting is crucial for surviving slower trading periods.

Accountants

The 7 reasons why SMEs struggle with cash flow management

Find out the 7 major reasons why your clients’ businesses struggle to achieve a positive, healthy, consistent cash flow.

Accountants

Take clients from compliance to scenario planning in five steps

Scenario planning helps your clients imagine different environments or realities in the future, guiding the plans and decisions your clients make.

Accountants

Flash reports and why to build them

This short guide covers what Flash Reports are and how you could use them as a speedy solution for your clients’ reporting needs.

Small Businesses

Head of Accounting and Futrli COO discuss challenges and solutions for small businesses.

Read Dan and Helen’s thoughts on how SMEs can protect themselves during what is set to be a challenging year.