Credit Loss

Definition

A Credit Loss is a debt that a company is unlikely to recover. When a company extends credit to a customer (meaning they do not have to pay at the time of purchase) it is not always a guarantee that the amount owing will be paid.

Current assets are reported as Accounts Receivables on a company’s balance sheet. Current assets are expected to turn to cash within one year, and a company’s balance sheet could overstate their accounts receivable if any are not collectible.

To make sure they aren’t overstating their accounts receivables a company will estimate how many of their accounts receivables will never be paid. This estimate is reported on the balance sheet as an Allowance for Doubtful Accounts or a Provision for Credit Loss.

Credit Loss kept simple

A Credit Loss is a debt that a company is not able to collect. When a company extends credit to their clients they run the risk of the client never paying the debt. Companies account for these losses on their balance sheets as a Doubtful Account.

How does Credit Loss apply to you

If you own a company providing goods to restaurants and you extend credit to one of your restaurant clients you will run the risk of that client not paying the amount they owe you. This will mean a loss for your company and an account receivable that will never become cash. This needs to be balanced on the company records as a Credit Loss.

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