Every business that sells on credit eventually meets the customer who never pays. You booked the sale, you recognised the revenue, and now the money is simply not coming. This is where bad debts and the provision for doubtful debts enter your books — two ideas that trip up more accounting learners than almost any other topic in the syllabus. One deals with a loss you are certain about; the other with a loss you only suspect. Get the difference wrong and your profit, your debtors figure, and even your tax return end up misstated. This guide walks through the definitions, the exact journal entries, the effect on the profit and loss account and balance sheet, a full two-year worked example with a recovery, and the one tax rule in India that quietly reverses everything the textbook told you.
Bad debts vs provision for doubtful debts: what each really means
A bad debt is a receivable you have decided is irrecoverable. The customer has gone bankrupt, disappeared, or disputed the invoice beyond recovery. You stop hoping and write it off as an expense in the period you give up on it.
A provision for doubtful debts is different in one crucial way: it is an estimate. You are not saying any specific customer will default. You are saying that, across your whole debtors ledger, some slice will probably go unpaid — based on age, history, and judgment. So you set aside a cushion before the loss is confirmed.
The reason accountants insist on the provision is the prudence concept paired with the matching principle. Prudence says do not overstate assets or profits: if some debtors are shaky, show them at a realistic value. Matching says the cost of a credit sale — including the risk it is never collected — belongs in the same period as the sale itself, not two years later when the default finally happens. A provision pulls tomorrow's likely loss back into today's accounts, where it economically belongs.
If you are still building the muscle for why one transaction can hit two periods, our explainer on accrual vs cash accounting lays the foundation this topic rests on. And if you would rather learn the whole framework properly than stitch it together from scattered videos, a structured accounting course compresses months of confusion into a few clear weeks.
The journal entries, step by step
Almost every mistake with this topic is really a mistake about which account gets debited and which gets credited. Slow down here and the rest becomes easy. If debits and credits still feel slippery, keep our guide to double-entry bookkeeping basics open in the next tab.
Writing off an actual bad debt
When a specific debt turns bad, you remove it from debtors and recognise the loss:
- Dr Bad Debts A/c — the expense is born.
- Cr Sundry Debtors A/c — the customer leaves your books.
At the year end you close the expense into the profit and loss account: Dr Profit & Loss A/c, Cr Bad Debts A/c. The loss now sits against this year's profit.
Creating the provision
Separately, you estimate a provision on the debtors that remain and might still go bad:
- Dr Profit & Loss A/c — charge the estimated future loss now.
- Cr Provision for Doubtful Debts A/c — build the cushion.
Where each one lands in the statements
The bad debts expense and the provision charge both reduce profit in the profit and loss account. On the balance sheet, the provision is not shown as a liability in most syllabi — it is deducted from Sundry Debtors on the assets side, so what you report is net realisable debtors. That single presentation point earns easy marks and is the thing students most often get backwards.
One doubtful debt can touch three different accounts
Source: standard double-entry treatment (prudence and matching principles)
A full worked example: two years, with a recovery
Numbers make this concrete. Assume it is Year 1 and your ledger shows the following. All figures are illustrative teaching values, not real company data.
Year 1. Sundry Debtors stand at ₹5,00,000. On review, one customer owing ₹20,000 has clearly gone under — that is an actual bad debt. On the remaining debtors, you decide a 5% provision is prudent.
- Write off the confirmed bad debt: Dr Bad Debts ₹20,000, Cr Sundry Debtors ₹20,000. Debtors fall to ₹4,80,000.
- Create the provision on what is left: 5% of ₹4,80,000 = ₹24,000. Dr P&L ₹24,000, Cr Provision for Doubtful Debts ₹24,000.
- Total charge to Year 1 profit = ₹20,000 + ₹24,000 = ₹44,000.
- Balance sheet shows Debtors ₹4,80,000 less Provision ₹24,000 = ₹4,56,000 net.
Year 2. Now debtors are ₹6,00,000 and you again want a 5% provision, so the required provision is ₹30,000. Here is the point everyone misses: you do not charge the full ₹30,000 again. A provision of ₹24,000 already exists from last year. You only top it up by the difference.
- Required provision this year: ₹30,000.
- Existing provision brought forward: ₹24,000.
- Charged to Year 2 profit and loss: only the ₹6,000 increase.
If the required provision had instead fallen — say to ₹18,000 — the surplus ₹6,000 would be written back as income, a credit to the profit and loss account. The provision behaves like a tap you adjust up or down, not a fresh full charge every year.
Because the cushion is already built, the Year 2 profit charge collapses
Source: illustrative worked example (figures for teaching only)
Only the change in the provision hits next year's profit
| Item | Year 1 | Year 2 |
|---|---|---|
| Debtors after write-off | ₹4,80,000 | ₹6,00,000 |
| Provision required (5%) | ₹24,000 | ₹30,000 |
| Actual bad debt written off | ₹20,000 | — |
| Charged to profit & loss | ₹44,000 | ₹6,000 |
| Net debtors on balance sheet | ₹4,56,000 | ₹5,70,000 |
Source: illustrative worked example (figures for teaching only)
What if a written-off debt is later paid?
Occasionally a customer you gave up on surprises you and pays. You do not reopen the old debtor account. You treat it as a fresh gain:
- Dr Cash / Bank A/c — the money is real now.
- Cr Bad Debts Recovered A/c — a credit that flows to the profit and loss account as income.
Keeping recoveries in their own account matters, because it lets you see how much of your written-off debt eventually comes back — a genuine signal of how aggressively you judge debts as bad.
Want to record entries like these without second-guessing?
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Hold the two ideas next to each other and the exam traps disappear.
| Criterion | Bad debts (write-off) | Provision for doubtful debts |
|---|---|---|
| Nature of loss | Certain — a known default | Estimated — an expected loss |
| Tied to a specific customer? | ✓ Yes | ✗ No — a portfolio estimate |
| Effect on debtors | Directly reduces Sundry Debtors | Shown as a deduction from debtors |
| Charge to profit & loss | Full amount written off | Only the increase or decrease |
| Reversible? | Only via a recovery entry | Yes — written back if it falls |
| Underlying concept | Recognising a real loss | Prudence and matching |
The neat way to remember it: a bad debt is a certain loss you record; a provision is an expected loss you anticipate. Estimates like this one sit in the same family as depreciation methods — both are judgment-based charges that spread a cost sensibly rather than waiting for a single dramatic event.
The book-vs-tax trap: Section 36 of the Income Tax Act
Here is where many learners — and more than a few working accountants — come unstuck. Everything above is how you keep your books. Indian income tax law does not fully agree with it.
Under Section 36(1)(vii) of the Income Tax Act, 1961, a bad debt is deductible only when it is actually written off in the books of account and relates to your business. Real write-offs reduce taxable income. But a provision for doubtful debts is generally not allowed as a tax deduction for an ordinary business — because it is only an estimate, not a confirmed loss. When you compute taxable profit, that provision charge is added back.
So the same ₹24,000 provision that reduced your accounting profit does not reduce your tax bill until a specific debt actually goes bad and is written off. This is a classic source of the gap between book profit and taxable profit.
The one big exception sits in Section 36(1)(viia), which lets scheduled banks and certain financial institutions deduct a provision for bad and doubtful debts within prescribed limits — for instance a percentage of total income plus a slice of rural advances. Ordinary trading and manufacturing companies do not get this relief. Recognising which entity you are looking at is the whole game.
Exam and real-world takeaway: never assume the accounting charge and the tax deduction are the same number. For provisions, they usually are not.
Common mistakes and what to learn next
Avoid the five errors that cost the most marks and cause the most real-world reconciling headaches:
- Charging the full provision every year instead of only the change — the single most common slip.
- Showing the provision as a liability rather than deducting it from debtors on the assets side.
- Reopening the debtor account on a recovery, instead of crediting Bad Debts Recovered.
- Creating the provision before writing off the confirmed bad debt — write off first, then provide on what remains.
- Assuming the provision is tax-deductible for a normal business — it is not.
Bad debts and provisioning are one gear in a much larger machine: from the trial balance through adjustments to a clean set of final accounts. Once you can post these entries in your sleep, distinctions like capital vs revenue expenditure and depreciation stop being memorised rules and start being obvious. That is what structured study buys you: not more facts, but a framework where each new topic clicks into the last.
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Start the ACCA Knowledge Level courseFrequently Asked Questions
What is the difference between bad debts and provision for doubtful debts?
A bad debt is a receivable you know is irrecoverable, so you write it off in full as an expense. A provision for doubtful debts is an estimate set aside against debtors that might not pay, based on age and history. The first is a certain loss; the second anticipates an expected loss under the prudence concept.
What is the journal entry for creating a provision for doubtful debts?
You debit the Profit & Loss Account and credit the Provision for Doubtful Debts Account with the amount of the estimated loss. On the balance sheet the provision is deducted from Sundry Debtors, so the debtors are reported at their net realisable value rather than their gross figure.
Does the whole provision go to the profit and loss account every year?
No. Only the change in the provision is charged. If last year's provision was ₹24,000 and this year you need ₹30,000, you charge just the ₹6,000 increase. If the required provision falls, the surplus is written back as income. Charging the full amount again is the most common error.
How is a recovery of a bad debt recorded?
When a previously written-off debt is paid, you debit Cash or Bank and credit a separate Bad Debts Recovered Account, which is taken to the profit and loss account as income. You do not reopen the original debtor account, because that customer was already removed from your books at write-off.
Is provision for doubtful debts allowed as a deduction under Indian income tax?
For an ordinary business, no. Under Section 36(1)(vii) of the Income Tax Act, 1961, only debts actually written off are deductible; a mere provision is added back when computing taxable income. Section 36(1)(viia) is a narrow exception that lets scheduled banks and certain financial institutions deduct a provision within prescribed limits.
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