what does provision for credit losses mean 
the provision for credit losses pcl is an estimation of potential losses that a company might experience due to credit risk the provision for credit losses is treated as an expense on the company s financial statements they are expected losses from delinquent and bad debt or other credit that is likely to default or become unrecoverable if for example the company calculates that accounts over 90 days past due have a recovery rate of 40 it will make a provision for credit losses based on 40 of the balance of these accounts understanding provision for credit losses pcl because accounts receivable ar is expected to turn to cash within one year or an operating cycle it is reported as a current asset on a company s balance sheet however since accounts receivable may be overstated if a portion is not collectible the company s working capital and stockholders equity may be overstated as well to guard against overstatement a business may estimate how much of its accounts receivable will most likely not be collected the estimate is reported in a balance sheet contra asset account called provision for credit losses increases to the account are also recorded in the income statement account uncollectible accounts expense example of provision for credit lossescompany a s ar has a debit balance of 100 000 on june 30 approximately 2 000 is expected to not turn to cash as a result a credit balance of 2 000 is reported as a provision for credit losses the accounting entry for adjusting the balance in the allowance account involves the income statement account uncollectible accounts expense because june was company a s first month in business its provision for credit losses account began the month with a zero balance as of june 30 when it issues its first balance sheet and income statement its provision for credit losses will have a credit balance of 2 000 because the provision for credit losses is reporting a credit balance of 2 000 and ar is reporting a debit balance of 100 000 the balance sheet reports a net amount of 98 000 as the net amount will likely turn into cash it is called the net realizable value of the ar company a s uncollectible accounts expense reports credit losses of 2 000 on its june income statement even though none of the ar was due in june the expense is reported since terms are net 30 days company a is attempting to follow the matching principle by matching the bad debts expense to the accounting period in which the credit sales occurred 