• A bad debt reserve is a valuation account used to estimate the amount of a firm’s accounts receivable that may eventually become uncollectible.
  • Creditors use a provision for bad debts because the face value of the firm’s total receivables is not the actual balance that is eventually collected.
  • The main methods for estimating the allowance for doubtful debts are the sales method and the accounts receivable method.
  • Under generally accepted accounting principles (GAAP), the main requirement for bad debt provision is that it accurately reflects the firm’s collection history.