Is the provision for doubtful debts an operating expense?

Some people use Provision for Doubtful Debts to mean the contra-asset account reported on the balance sheet. Others use Provision for Doubtful Debts to mean the expense reported on the income statement.

If Provision for Doubtful Debts is the current period expense associated with the losses from normal credit sales, it will appear as an operating expense—usually as part of Selling, General and Administrative Expenses (SG&A). If the expense is associated with extending credit outside of a company’s main selling activities, the credit loss will be reported as a nonoperating (or other) expense.

To avoid the confusion with the use of the word “provision”, the accounting textbooks often refer to the contra-asset account associated with accounts receivable as Allowance for Doubtful Accounts. The current period expense pertaining to accounts receivable is referred to as Bad Debt Expense, an operating expense.

Learn more about the Income Statement.

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