Bad Debts And Provision For Bad Debts: Meaning - SS1 Accounting Lesson Note

Bad debts refer to the amounts owed to a business by its customers or clients that are unlikely to be paid in full. These debts can arise due to various reasons such as customers going bankrupt, defaulting on their payments, or simply refusing to pay.

A provision for bad debts, on the other hand, is an accounting entry that sets aside a portion of a company's revenue to cover potential future losses from bad debts. The provision is an estimated amount that the company expects to write off as bad debts in the future.

Bad debts represent the actual losses a business incurs from customers who fail to pay their debts, while the provision for bad debts represents the anticipated losses that a business sets aside in advance to cover potential bad debts. Both concepts are important in accounting as they help a business to manage its cash flow and ensure that its financial statements accurately reflect its financial position.