Bad debts and provision for doubtful debts, explained simply.

What is provision for doubtful debts?

When you sell goods on credit, some customers simply won't pay — that's a business reality, not bad luck. Accounting deals with this in two separate steps.

Bad debts are amounts you've already confirmed you will never recover — a specific customer has gone bankrupt, is untraceable, or has formally refused to pay. You remove that amount from Debtors entirely and treat it as a loss.

Provision for doubtful debts is different — it's an estimate, made at the year-end, that some percentage of your remaining (still-good) debtors might also default later. You haven't lost this money yet. You're simply not overstating your assets by pretending every rupee of debtors will definitely come in. This is the accounting concept of prudence (or conservatism) at work: anticipate probable losses, don't wait for certainty.

Bad debts vs provision for doubtful debts — the difference

Students lose marks mixing these up. Side by side:

In short: bad debts are fact, the provision is forecast. Once a bad debt is confirmed, it's written off first — the provision is only calculated on what's left after that.

The three-step rule every year

1. Write off the actual bad debt — remove the specific customer's balance from Debtors and charge it to a Bad Debts Account.
2. Transfer Bad Debts to Profit & Loss — it's an expense for the year it's confirmed.
3. Create or adjust the provision on the debtors that remain — usually a fixed percentage (say 5%) decided from past experience of defaults. Only the change in the provision (up or down) passes through Profit & Loss — never the full new balance.

Live worked example

Year 1: Sundry Debtors stand at ₹50,000 on 31 March. During the final review, one customer's balance of ₹2,000 is confirmed irrecoverable and written off. The firm then creates a provision for doubtful debts @5% on the remaining good debtors.

Debtors after write-off = ₹50,000 − ₹2,000 = ₹48,000. Provision required = 5% × ₹48,000 = ₹2,400.

Debits equal credits at ₹6,400 on both sides. At the year-end, the balance sheet shows:

Year 2: how the old and new provisions net off

By the next 31 March, debtors (before any write-off) have grown to ₹65,000. A further ₹3,000 turns out to be bad and is written off. Debtors after write-off = ₹62,000. The required provision @5% is now ₹3,100.

Here's the part students find confusing: you don't create a fresh ₹3,100 provision from scratch. This year's actual bad debts of ₹3,000 are written off and charged to Profit & Loss in full, exactly like Year 1. Separately, the Provision for Doubtful Debts A/c is only adjusted by its net movement — the old balance of ₹2,400 needs to become ₹3,100, so only the increase of ₹700 is charged fresh to Profit & Loss. The provision is never reduced by the year's bad debts — that would double-count what's already gone through Bad Debts A/c.

Check it ties out: the Provision for Doubtful Debts account started the year at ₹2,400 (credit balance brought forward) and is credited by a fresh ₹700 from Profit & Loss — closing at exactly ₹3,100, the newly required 5% of ₹62,000. Add the ₹3,000 bad debts charged separately, and the total hit to this year's Profit & Loss is ₹3,700 (₹3,000 bad debts + ₹700 provision increase) — not the full ₹3,100 provision balance.

Both sides of the T-account total ₹3,100, and the account correctly carries down a closing credit balance of ₹3,100 into Year 3.

Common mistakes students make

• Charging the full new provision to P&L every year. Only the increase (or decrease) from the previous balance hits Profit & Loss — not the whole recalculated figure.
• Calculating the provision on debtors before write-off. Always deduct confirmed bad debts first, then apply the percentage to what's left.
• Crediting a specific debtor's account with the provision. The provision is never posted against any individual customer — it sits in one pooled Provision for Doubtful Debts account and is only deducted from the total in the balance sheet.
• Forgetting to show the provision as a deduction, not a liability. It reduces debtors on the assets side; it does not appear under liabilities.
• Reopening a written-off customer's account on later recovery. Record recovery as a fresh Bad Debts Recovered entry instead — the closed account stays closed.

In TatvaBooks, this happens automatically

Writing off a bad debt and re-basing your provision by hand, every year, for every customer, is exactly the kind of arithmetic where a decimal slips. In TatvaBooks, writing off a customer posts the Bad Debts entry and updates their ledger in one step, and your ageing-based provision policy recalculates the required balance automatically at period-end — so the P&L only ever picks up the genuine year-on-year movement, never the full balance by mistake. Your CA sees the same debtors ageing and provision workings live, with nothing to reconcile after the fact.

Start free on TatvaBooks Solo and see your debtors ageing calculate itself, or explore the cloud accounting software built for Indian books.

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