Provisions for Credit Notes & Doubtful Debts: Codes 1105 & 1106

The total sitting in Debtors rarely all gets collected in full — some customers will dispute an invoice and get a credit note, others simply won't pay. Rather than wait and be surprised, Sage lets a business build a provision against both possibilities up front.

The two codes, and what each one holds

Code 1105 — Provision for Credit Notes estimates future credit notes expected to be issued against sales already recorded, reducing Debtors without altering any individual customer's account.

Code 1106 — Provision for Doubtful Debts estimates debts that may never be collected at all, bringing Debtors down to a more realistic, recoverable figure. Both are contra-asset accounts and, unlike most asset codes, normally carry a credit balance — increasing the provision is a credit entry, releasing it is a debit entry.

Real-world examples across industries

E-commerce and fashion retail

An online fashion retailer with wholesale stockist accounts totalling £60,000 in Debtors builds a returns provision from a return rate that can reach 20-30% on certain product lines — increasing it by £3,000 this quarter, a credit of £3,000 to 1105 (Provision for Credit Notes) matched by a debit that trims recognised turnover for the anticipated returns. Its doubtful debt provision, by contrast, barely moves — most consumer sales are settled by card upfront, so only the handful of wholesale accounts on credit terms carry real non-payment risk: a modest £400 increase, a credit of £400 to 1106 (Provision for Doubtful Debts) and a debit of £400 to 8102 (Bad Debt Provision).

Wholesale and distribution

A distributor offering end-of-year volume rebates to larger trade customers anticipates £2,200 of credit notes once annual purchase volumes are confirmed — a credit of £2,200 to 1105, built from known contractual terms rather than a statistical return rate. Its debtor book has also grown from £400,000 to £460,000 over the year, moving a blanket 2% general provision up by £1,200 (a credit of £1,200 to 1106, debit £1,200 to 8102), on top of a further £3,000 specific provision against one named customer showing real signs of financial difficulty (credit £3,000 to 1106, debit £3,000 to 8102). Only the £3,000 specific element is deductible for corporation tax; the general 2% movement isn't, however prudent it is.

Construction and subcontracting

Payment chains in construction run main contractor to subcontractor to sub-subcontractor, so a subcontractor increases its doubtful debt provision by £6,000 to reflect genuine sector-wide payment risk rather than doubts about any one customer — a credit of £6,000 to 1106 and a debit of £6,000 to 8102. Provision for Credit Notes, on the other hand, sees almost no use at all: completed building work isn't returned the way goods are, so 1105 typically sits at nil unless a specific valuation dispute results in an agreed credit.

Why this matters day to day

Reporting the full £50,000 as if every penny will be collected overstates the business's assets and its profit. Reviewing and adjusting these provisions regularly — rather than setting them once and forgetting them — keeps the balance sheet realistic and avoids a nasty surprise write-off much later when a bad debt is finally confirmed.