Bad Debts and the Provision for Bad and Doubtful Debts

Abstract

Most transactions in business are conducted on a credit basis, and the majority of customers do meet their obligations. Credit is not usually given to customers until references have been obtained regarding their ability to pay their debts and their creditworthiness. However, occasionally it may happen that a customer, sometimes through no fault of his own, is not in a position to pay his account. A debtor who cannot pay his debt is called a ‘bad’ debtor, and the debt owing is referred to as a ‘bad debt’. Usually many attempts will have been made in an effort to recover the outstanding amount but, whatever the reason or circumstances, if a debtor cannot pay what is owed and the amount becomes irrecoverable, it is a business loss, and must be treated in the same way as other losses and expenses.