Provision for Doubtful Debts

This is a contra-asset account estimating debts that may never be collected, reducing Debtors on the balance sheet to a more realistic recoverable value. It normally carries a credit balance — increasing the provision is a credit entry, and releasing it is a debit entry.

Real-world examples

Construction and subcontracting

Payment chains in construction run main contractor to subcontractor to sub-subcontractor, so a collapse further up the chain can leave a subcontractor with a large, sudden bad debt exposure. Businesses in this sector often carry a more material provision than their turnover alone would suggest, reflecting genuine sector-wide payment risk rather than doubts about any particular customer.

Subscription and SaaS businesses

A SaaS business collecting payment by card upfront, before access is granted, has very little doubtful debt risk to provide for — most of what would be a debtor elsewhere is settled before the service is even delivered. Where a provision exists at all, it's usually tiny and relates to failed renewal payments rather than trade credit gone bad.

Wholesale and distribution

A distributor with a broad customer base often splits this into a specific provision — for named customers showing real signs of financial difficulty — and a general provision, a percentage applied across the rest of the debtor book as a cushion. Worth knowing: HMRC only allows tax relief for the specific element; a general provision, however prudent, isn't deductible for corporation tax purposes.

Commonly confused with

Because code 1105 (Provision for Credit Notes) sits right next to this one in Current Assets, it's a common mis-posting target. Code 1106 is specifically for provision for doubtful debts, while 1105 covers provision for credit notes — similar in nature, but keeping them separate is what makes the current assets section of your management accounts meaningful rather than a single lumped total.

What a mis-posting here costs you

Because Provision for Doubtful Debts sits within Current Assets, an error here overstates or understates working capital on the balance sheet rather than affecting reported profit — it won't move the bottom line, but it can make the business look more, or less, liquid than it actually is.

Other codes in Current Assets