Bad Debt Provision and the Allowance for Doubtful Debts

Write-off and provision are different tools

They are not interchangeable, and using the wrong one misstates the accounts.

• —A specific write-off is for a receivable you are now certain will never be collected — the customer has gone out of business, say. You remove it from Accounts Receivable entirely.
• —A general provision applies when you do not yet know which specific balances will fail, but experience says some percentage of old overdue balances typically do. It estimates that expected loss in advance, without claiming certainty about any one customer.

Building a reasoned provision

A common convention is to provide 100% against balances over 90 days old with no payment activity, on the basis that collection likelihood is now genuinely low. Applied to a worked example with two balances over 90 days — ₹2,01,171.77 and ₹2,90,409.02 — the full provision is ₹4,91,580.79.

That percentage is a policy choice, not a rule handed down from anywhere. What matters is that it is reasoned, consistently applied, and documented — a provision you can explain is defensible; one chosen to hit a profit number is not.

The entry, and what it deliberately does not touch

Debit Bad Debts Expense (or a dedicated Provision for Doubtful Debts expense line) and credit the Allowance for Doubtful Debts — a contra-asset account — for the same amount.

Note what does not happen: Accounts Receivable itself is untouched. The customer still technically owes the money. What changes is that the balance sheet now shows receivables at a realistic net value. In the worked example, ₹37,28,556.78 gross less ₹4,91,580.79 provided gives a more honest ₹32,36,975.99 net.

A provision is used, not reversed

This is the step most often got wrong. When a provided-for customer is later confirmed as never paying, you do not reverse the provision back into income and then book a fresh expense.

You use it: debit the Allowance for Doubtful Debts (clearing the amount already set aside for exactly this) and credit Accounts Receivable (finally removing the confirmed-uncollectible balance). The expense was already recognised when the provision was made. This final step does not hit the P&L again — it simply confirms what the provision anticipated.

Running it through the P&L twice overstates the loss in the later period and understates it in the earlier one.

Why this matters beyond bookkeeping

An unprovided receivables ledger overstates assets and overstates profit simultaneously. Anyone reading the balance sheet — a lender, an investor, an auditor — is being told the business expects to collect money it has good reason to believe will not arrive.

A ledger with an ageing report showing large over-90 balances but a zero allowance account is a visible, specific gap, and one of the first things a reviewer will ask about.

Common mistakes

• —Writing off a balance specifically when you only suspect, rather than know, it is uncollectible.
• —Reducing Accounts Receivable directly when making a general provision.
• —Reversing a provision into income on confirmation, then expensing the write-off again.
• —Maintaining an allowance account that sits at zero while the ageing report shows significant over-90 balances.
• —Changing the provisioning percentage each period to smooth reported profit.