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Bad debt and Provision

Former Member
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Hi

Want to know what is the difference between bad and doubtful debt and Provision posting.

Regards,

Sarah.

Accepted Solutions (0)

Answers (2)

Answers (2)

former_member188826
Active Contributor
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Debts sometimes can become bad, for various reasons, like customer becoming bankrupt or disputing and finally refusing to pay. Usually by experience, a company can sense it in advance. As a result, rather than taking the hit on one day, you can start providing a small percentage every month. SAP offers methods to do create <b>provision against bad and doubtful debts</b>, which is a standard practise in accounting. You specify a balance sheet account of liability type, (a current liability)

When a debt really turns bad, it is written off, but the hit will not be to the P&L but against the provision being made monthly to the extent the provision is available.

Former Member
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Hi,

Normally at the end of the financial an estimate is done regarding the doubtful receivables. A percentage of the total receivables is made and an accounting entry is created for the doubtful debts.

Bad debt is a term when there is a actual failure by a Customer to make payment. When this happens, this amount is knocked off from the provision account. Creation of provision ensures that a realistic picture of the receivables is taken and there is no wide fluctuation on account of Bad debt losses.

Thanks

Murali.