Allowance for Bad Debts

An allowance for bad debts is a financial provision set aside by businesses to account for potential losses from customers who may not pay their debts. It represents an estimate of accounts receivable that are unlikely to be collected, thereby reducing the reported amount of accounts receivable on the balance sheet. This allowance is crucial for accurately portraying the financial health of a company and is typically adjusted based on past payment history and economic conditions affecting customers’ ability to pay.