Provision For Credit Losses - PCL

AAA

DEFINITION of 'Provision For Credit Losses - PCL'

In accounting, an estimation of potential losses that a company might experience due to credit risk. Provision for credit losses is an estimated amount to be lost and is treated as an expense on the company's financial statements. Companies that engage in lending activities determine the provision for credit losses based on statistics that define the likelihood that debt will be recovered.

INVESTOPEDIA EXPLAINS 'Provision For Credit Losses - PCL'

The provision for credit losses is a means for financial institutions to account for expected losses from delinquent and bad debt. Based on historical statistics, a financial institution can make estimates regarding the amount of loans or other credit that is likely to become default and unsatisfied (default probability). If, for example, the company calculates that accounts over 90 days past due have a recovery rate of 40%, they can make a provision for credit losses based on 40% of the balance of these accounts.

RELATED TERMS
  1. Problem Loan Ratio

    A ratio in the banking industry that denotes the percentage of ...
  2. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  3. 60-Plus Delinquencies

    Home loans that are more than 60 days past due on their monthly ...
  4. Bad Debt

    A debt that is not collectible and therefore worthless to the ...
  5. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  6. Bad Debt Reserve

    An account set aside by a company to account for and offset losses ...
RELATED FAQS
  1. What are some of the limitations and drawbacks of using a payback period for analysis?

    Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >>
  2. What are common concepts and techniques of managerial accounting?

    The common concepts and techniques of managerial accounting are all the concepts and techniques that surround planning and ... Read Full Answer >>
  3. How are fixed costs treated in cost accounting?

    Fixed costs are one of the two major inputs, along with variable costs, in cost accounting that are used by a company's management ... Read Full Answer >>
  4. When would a vendor care about its accounts payable turnover ratio?

    Vendors can act as suppliers or manufacturers, so they must pay attention to accounts payable and accounts receivable. An ... Read Full Answer >>
  5. What are some examples of debit notes in business-to-business transactions?

    Debit notes are a form of proof that one business has created a legitimate debit entry in the course of dealing with another ... Read Full Answer >>
  6. What types of assets may be considered off balance sheet (OBS)?

    Though the off-balance-sheet accounting method can be used in a number of scenarios, this accounting practice is especially ... Read Full Answer >>
Related Articles
  1. Insurance

    Credit Default Swaps: What Happens In A Credit Event?

    The credit crisis of 2008 prompted important changes to the settlement of credit default swaps.
  2. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  3. Personal Finance

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  4. Mutual Funds & ETFs

    Why Hedge Funds Love Distressed Debt

    When hedge funds buy up bonds from bankrupt companies, should investors follow suit?
  5. Mutual Funds & ETFs

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  6. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.
  7. Taxes

    Understanding Write-Offs

    Write-off has different meanings depending on the context in which it is used, but generally refers to a reduction in value due to expense or loss.
  8. Economics

    What are Capital Goods?

    Capital goods are assets with a useful life of more than one year that are used for the production of income.
  9. Economics

    Understanding Capital Assets

    A capital asset is one that a company plans on owning for more than one year, and uses in the production of revenue.
  10. Fundamental Analysis

    What is Year-to-Date?

    Year-to-date (YTD) is a term that describes financial results from the beginning of the current year up to the day the financial number is reported.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!