A bad debt provision (or allowance for doubtful debts) is an estimated amount set aside to cover accounts receivable that may not be collected.
The bad debt provision is an accounting estimate that reflects the reality that not all receivables will be collected. Rather than waiting for specific debts to become uncollectable, businesses estimate the total likely bad debts and create a provision (contra-asset) that reduces the reported value of accounts receivable on the balance sheet. The provision is typically calculated using one of two approaches: the percentage of sales method (applying a historical bad debt rate to total credit sales) or the ageing method (applying different estimated uncollectable percentages to each ageing bucket). For example, you might estimate 1% of current receivables, 5% of 30-day, 15% of 60-day and 50% of 90+ day receivables are uncollectable. The provision expense appears on the profit and loss statement. When a specific debt is confirmed as uncollectable, it is written off against the provision rather than as a separate expense. SortBooks helps manage bad debt provisions by providing accurate ageing analysis and flagging at-risk receivables.
SortBooks helps with the bookkeeping behind bad debt provision by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing bad debt provision by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Bad debt is money owed to your business that you determine is uncollectable. Writing off bad debt removes the amount from accounts receivable and records it as an expense.
Accounts receivable (AR) is the money owed to your business by customers who have purchased goods or services on credit. It is a current asset on your balance sheet.
An ageing report categorises accounts receivable or accounts payable by the length of time invoices have been outstanding, typically in 30-day buckets (current, 30, 60, 90+ days).
A provision is an amount set aside in your accounts for an expected future liability or expense that is probable but not yet certain in amount or timing.
A write-off is the removal of an asset's remaining value from the books, recording it as an expense. Common write-offs include bad debts, obsolete inventory and damaged assets.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.