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.