reserve for bad debts

Definition

An estimate of accounts receivable that will never be collected, subtracted from assets to present a more realistic balance sheet. It's acknowledging that some customers are deadbeats before they officially become deadbeats.

Example Usage

The company increased its reserve for bad debts by $2 million after several major customers filed for bankruptcy.

Origin

Accounting practice dating to early credit sales, formalized in modern standards as 'allowance for doubtful accounts'

Fun Fact

Companies that consistently underestimate bad debt reserves often face dramatic write-offs later—sudden 'surprises' that sophisticated analysts saw coming.

Source: Accounts receivable accounting standards

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