What is the provision for bad debts?

The provision for bad debts in finance refers to the amount of money that a company sets aside on its balance sheet to account for the potential losses that may arise from customers who are unable to pay their debts. This provision is a precautionary measure taken by companies to ensure that they are adequately prepared for any potential losses that may occur due to non-payment of debts. The provision for bad debts is typically calculated based on historical data and analysis of the creditworthiness of the company's customers. It is important for companies to accurately estimate the amount of bad debts that they may incur in order to properly reflect their financial position and performance. The provision for bad debts is recorded as an expense on the income statement, which reduces the company's net income. By setting aside a provision for bad debts, companies are able to more accurately represent their true financial position and provide a more realistic picture of their financial performance. Overall, the provision for bad debts is a crucial aspect of financial management as it helps companies to effectively manage their credit risk and ensure that they are adequately prepared for any potential losses that may arise from non-payment of debts.