Allowance For Bad Debt

AAA

DEFINITION of 'Allowance For Bad Debt'

A valuation account used to estimate the portion of a bank's loan portfolio that will ultimately be uncollectible. When a loan goes bad, the asset is removed from the books and the allowance for bad debt is charged for the book value of the loan.

Also known as "loan-loss reserve."

INVESTOPEDIA EXPLAINS 'Allowance For Bad Debt'

The allowance-for-bad-debt account is needed because the face value of a bank's loans are not the actual value, since a certain portion of those assets can be reasonably predicted to go bad.

Increases to the allowance for bad debt are made by periodic loan-loss provisions, which replenish the allowance and are recorded on the income statement as an expense. The use of the allowance method tends to smooth bank earnings, which otherwise might undergo unusual fluctuations when loans that have deteriorated over long periods of time are charged off together in a single period.

RELATED TERMS
  1. Provision For Credit Losses - PCL

    In accounting, an estimation of potential losses that a company ...
  2. Bank Capital

    The difference between the value of a bank's assets and its liabilities. ...
  3. Loan Loss Provision

    An expense set aside as an allowance for bad loans (customer ...
  4. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
  5. Bad Debt

    A debt that is not collectible and therefore worthless to the ...
  6. Bad Debt Reserve

    An account set aside by a company to account for and offset losses ...
RELATED FAQS
  1. How should an accountant correctly record and report a change in an accounting estimate?

    Business accountants sometimes need to use estimates to record the values of transactions or other assets and liabilities. ... Read Full Answer >>
  2. What are the differences between absorption costing and variable costing?

    Absorption costing includes all costs, including fixed costs, in figuring the cost of production, while variable costing ... Read Full Answer >>
  3. What does inventory turnover tell an investor about a company?

    The inventory turnover ratio determines the number of times a company's inventory is sold and replaced over a certain period. ... Read Full Answer >>
  4. What is a deferred tax liability?

    A deferred tax liability is an account that is listed on a company's balance sheet and occurs when its taxable income is ... Read Full Answer >>
  5. What are the pros and cons of using the fixed charge coverage ratio?

    One main advantage of using the fixed-charge coverage ratio is it provides a good, fundamental assessment for lenders or ... Read Full Answer >>
  6. What are the disadvantages of using the sinking fund method to depreciate an asset?

    Using the sinking fund depreciation definitely impinges on a company's cash flow and profitability during the depreciation ... Read Full Answer >>
Related Articles
  1. Insurance

    Is Loan Protection Insurance Right For You?

    This coverage can keep you from defaulting on your loans when you're in financial trouble.
  2. Budgeting

    Negotiating A Debt Settlement

    If you're being harassed by a debt-collection agency, you can take charge. Find out how.
  3. Personal Finance

    Using Economic Capital To Determine Risk

    Discover how banks and financial institutions use economic capital to enhance risk management.
  4. Fundamental Analysis

    The One-Time Expense Warning

    These income statement red flags may not spell a company's downfall. Learn why here.
  5. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  6. Personal Finance

    Dawn Of The Zombie Debt

    Are old debts coming back to haunt you? We'll show you how to keep these zombies from eating you alive.
  7. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  8. Economics

    What is Involved in Inventory Management?

    Inventory management refers to the theories, functions and management skills involved in controlling an inventory.
  9. Economics

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.
  10. Economics

    Explaining Activity-Based Costing

    Activity-based costing (ABC) is a managerial accounting method that assigns certain indirect costs to the products incurring the bulk of those costs.

You May Also Like

Hot Definitions
  1. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  2. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  3. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  6. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
Trading Center