Allowance For Credit Losses

What is an 'Allowance For Credit Losses'

An estimation of the debt that a company is unlikely to recover. The allowance for credit losses is from the perspective of the selling company that extended credit to its buyers. A certain amount of credit losses can be anticipated, and these expected losses are included as a contra asset and as an expense in the company's balance sheet and income statement respectively.


The line item is usually "Allowance For Credit Losses" or "Allowance For Doubtful Accounts" or a "Bad Debt Expense" entry. A company can use statistical modeling such as default probability to determine its expected losses to delinquent and bad debt. The statistical calculations can utilize historical data from the institution as well as from the industry as a whole.

BREAKING DOWN 'Allowance For Credit Losses'

A certain percentage of loans are expected to become delinquent. The allowance for credit losses is an accounting technique that allows companies to take these anticipated losses into consideration in its financial statements to limit overstatement of potential income. Companies regularly make changes to the allowance for credit losses entry to correlate with the current statistical modeling allowances. Companies may have a bad debt reserve to offset these credit losses.

RELATED TERMS
  1. Provision For Credit Losses - PCL

    In accounting, an estimation of potential losses that a company ...
  2. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
  3. Credit Limit

    The amount of credit that a financial institution extends to ...
  4. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  5. Bad Credit

    A qualification of an individual's credit history that indicates ...
  6. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
Related Articles
  1. Investing

    Understanding Bad Debt

    Bad debt is money a company or lender is owed, but is unable to collect.
  2. Investing

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  3. Personal Finance

    Consolidating Debt: What If You Have Bad Credit?

    Getting a debt consolidation loan is more difficult when you have bad credit. But it could still help put you on the road to improving your credit score.
  4. Investing

    5 Ways Bad Credit Screws Up Your Life

    When your credit score slumps, many other things in your life can also start to slide downward. How to recognize the situation and start dealing with it.
  5. Investing

    What is a Contra Account?

    A contra account is an offset that reduces the value of a related account.
  6. Personal Finance

    The Basics Of Lines Of Credit

    Lines of credit are potentially useful hybrids of credit cards and normal loans. Learn how a line of credit can help (and hurt) your finances, and how to find the best one to suit your needs. ...
  7. Investing

    Understanding Credit

    Credit has three common meanings in the financial world.
  8. Personal Finance

    6 Ways To Build Credit Without A Credit Card

    It's definitely possible – if a bit more complicated – to build a credit history without traditional credit cards. Just follow these steps.
  9. Investing

    Millennials: Prevent a Bad Credit Score

    Here are five ways to help prevent getting a bad credit score that could affect future loan, credit card or mortgage approvals.
  10. Investing

    Analyzing A Career In Credit Analysis

    If you're a number-cruncher and responsibility doesn't scare you, this could be the job for you.
RELATED FAQS
  1. What is the difference between bad credit and no credit?

    The answer to this question will depend on what information (if any) is found on your credit report, such as any bankruptcy ... Read Answer >>
  2. Is it possible to have a credit limit that's too high?

    Avoid these pitfalls when working with high credit limits, and learn how to increase your credit score by increasing your ... Read Answer >>
  3. What are the benefits of credit ratings?

    Credit ratings are an important tool for borrowers to gain access to loans and debt. Good credit ratings allow borrowers ... Read Answer >>
  4. How do I get a higher limit on my credit cards?

    Understand how credit limits work with major credit card companies and things you can do to get a higher limit on your credit ... Read Answer >>
  5. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ... Read Answer >>
  6. What credit rating should I look for in an oil and gas company?

    Determine what credit rating to look for in an oil and gas company. Credit ratings reflect evaluations by credit agencies ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center