PRC-1 · Chapter 5 · Question 41 of 100
Which of the following describes the core distinction between 'Bad Debts' and 'Allowance for Doubtful Debts'?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Bad debts are confirmed losses written off the ledger, while the allowance is a contra-asset estimate for future unconfirmed losses.
Explanation
A bad debt is a factual, recognized loss that removes the receivable. An allowance is a provision/estimate for potential future defaults on debts that currently remain on the books.
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