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. 60-Plus Delinquencies

    Home loans that are more than 60 days past due on their monthly ...
  3. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  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. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>
  2. What can working capital turnover ratios tell a trader?

    A company's working capital turnover ratio is traditionally positively correlated with business performance. A high, or better ... Read Full Answer >>
  3. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>
  4. What metrics can be used when evaluating a telecommunications company to ensure its ...

    Cash flow analysis has been transformed since the widespread introduction of statements of cash flow, and investors have ... Read Full Answer >>
  5. How do you record adjustments for accrued revenue?

    An accountant records adjustments for accrued revenues through debit and credit journal entries in defined accounting periods ... Read Full Answer >>
  6. What do I do if I think an accountant is in violation of the Generally Accepted Accounting ...

    The Financial Accounting Standards Board (FASB) promulgates generally accepted accounting principles (GAAP) in the United ... 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. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.
  7. Professionals

    What Does an Auditor Do?

    An auditor ensures that organizations maintain accurate and honest financial records.
  8. Fundamental Analysis

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  9. Economics

    How Does an Operating Lease Work?

    Operating lease is a term used mostly in accounting to denote a lease that gives the lessee rights to use and operate an asset without ownership.
  10. Economics

    Understanding Historical Cost

    Historical cost equals the original purchase price of an asset recorded on a company’s balance sheet.

You May Also Like

Hot Definitions
  1. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  2. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  3. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  4. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  5. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
  6. Himalayan Option

    An exotic equity option belonging to a class known as mountain range options. Himalayan options are based on a basket of ...
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!