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.
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