Allowance for Receivables & Provision for Bad Debts

[lws_sanlee]

What is the difference between allowance for receivables & provision for bad debts?

TQ.

[Tammi]

Hi,
Allowance for receivables - there is some doubt whether a customer can or will pay his debt.

Bad debts i.e. irrecoverable debts - it is unlikely that the amount owed by a customer will be received

Provision - Present obligation, legal or constructive, as a result of a past
event.

Generally, allowance for receivables and provision are a bit similar, in the first case you may be paid or may not and in the second case you may pay or you may not. I passed F3 in december and I remember a question about provision, it was about warranties. I had to calculate the percentage of provision and then send the movement (the difference between opening and closing balances) to the relevant expense account and consequently to the income statement.

[faryasz]

that's is very good and useful, but can u plz give me an example of all this?can u prove it? in this way i will be clear about it 100%/...thanks

[Acid]

Hi there ,

Imagine your Trade receivable consists of $1000. Now in this there is a debt to your friend Tom . you are sure that Debt is not going to pay $100 and rest of the Trade receivable will not pay around 5% of total Receivable ( you base this estimate on historic analysis or predictions ) .

So in this case $100 would be a bad debt and 5% of rest of receivable will be your allowance for receivable or irrecoverable debt of provision for doubtful debt.

So Allowance for doubtful debt is just a provision because you are unsure if they would pay or not but most probably they wouldnt pay.

Best Regards