What Is an Allowance For Doubtful Accounts?

The reserve for bad debts is a fund that is drawn at a certain percentage of the loan and is used as a write-off for losses on bad debts. ^[1]

Reserve for doubtful accounts

Provision for bad debts refers to the

Types of bad debt reserves

In the practice of banks in various countries, the following three types of bad debt reserves are generally provided:

General bad debt reserve

Risk

Calculation steps for bad debt reserve

in

Withdrawal of bad debt reserves

Cumulative withdrawal of bad debt reserves for the current year = end of year

A commercial bank withdraws bad debt reserves. The write-off of bad debts must comply with legal requirements. Only under the legal procedures and scope can a commercial bank write off its bad debt reserves. The bad debt reserve drawn by a commercial bank is used to make up for the following losses of a commercial bank:

(1) The borrower and the guarantor declared bankruptcy according to law, and after the settlement was made, the loan could not be repaid.

(2) The borrower died or failed to pay off the loan after he declared his disappearance or death in accordance with the provisions of the General Principles of the Civil Law.

(3) The borrower suffered a major natural disaster or accident, suffered huge losses and was unable to obtain insurance compensation. Some or all of the loans were indeed unable to be repaid, or loans that were not repaid after settlement with insurance compensation.

(4) Overdue loans approved by the State Council.

The write-off of bad debts shall be subject to a graded approval system, strict approval procedures shall be performed, and bad debts shall be written off in a timely manner. Foreign exchange loans should be drawn from the corresponding reserve for bad debts in Renminbi, and no cash can be withdrawn. In the event of losses on bad debts on foreign exchange loans, after review and approval, you can apply for foreign exchange purchases to offset the losses on foreign exchange loans.