Provision for doubtful debts

What it means

An amount set aside against trade receivables to allow for debts that may prove uncollectible, based on past experience.

Example

A 5% provision on RM10,000 of receivables is RM500.

Why it matters

It applies prudence, reducing receivables to a more realistic figure without removing a specific debt.

In practice

The provision for doubtful debts appears in two places. The change in the provision is shown in the income statement. The total provision is deducted from trade receivables in the statement of financial position. When it is first created or increased, you debit the income statement (an expense) and credit the provision account. If it later falls, the reduction is a small gain.

For example, receivables of RM20,000 with a 5% provision give RM1,000, so receivables appear net at RM19,000. If next year receivables are RM24,000, the provision rises to RM1,200. Only the RM200 increase is charged as an expense.

Do not confuse this with a bad debt written off. A bad debt removes a specific, named customer's balance, because it is known to be irrecoverable. The provision is a prudent estimate against receivables in general that have not yet failed. One is a definite loss, the other a cautious forecast.

If you often charge the whole provision instead of the change, one of our teachers can check your workings with you line by line. Book a trial class.

Related terms

• Irrecoverable debt
• Trade receivable
• Prudence concept

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.4 Irrecoverable debts and allowance for irrecoverable debts (page 15).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.