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. Bad Debt

    A debt that is not collectible and therefore worthless to the ...
  4. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
  5. Loan Loss Provision

    An expense set aside as an allowance for bad loans (customer ...
  6. Bad Debt Reserve

    An account set aside by a company to account for and offset losses ...
Related Articles
  1. Is Loan Protection Insurance Right For ...
    Insurance

    Is Loan Protection Insurance Right For ...

  2. Negotiating A Debt Settlement
    Budgeting

    Negotiating A Debt Settlement

  3. Using Economic Capital To Determine ...
    Personal Finance

    Using Economic Capital To Determine ...

  4. The One-Time Expense Warning
    Fundamental Analysis

    The One-Time Expense Warning

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center