# Provisions and Bad Debts: Recording Losses Before They Hit *Why wait for a loss to materialise before you book it? The difference between a provision and a reserve, and when to write a debt off instead of providing for it.* > **In short:** What are provisions and bad debts? A provision books a probable loss; a bad debt is one you can no longer collect. A plain guide to both, plus reserves. - **URL:** https://www.snad.io/en/blog/mukhassasat-duyun-maduma - **Arabic original:** https://www.snad.io/blog/mukhassasat-duyun-maduma - **Category:** Guides — Core Accounting - **Tags:** Provisions, Bad Debts, Doubtful Debts, Reserves, Prudence Principle, Accounting, Accounts Receivable - **Published:** 2026-06-17 - **Updated:** 2026-08-02 - **Publisher:** Snad (snad.io) A provision is an amount you set aside for a loss or obligation that is certain to occur but whose exact size you cannot pin down. It applies the principle of prudence — for example, providing for invoices some customers will probably never pay. A bad debt is different: it is a debt you have given up on collecting, so you write it off for real. And a provision is not a reserve, which is carved out of profits you have already earned. This guide explains how the three differ and how to handle doubtful and bad debts, with Saudi examples. ## What a provision is and why you need one A provision is **an amount you set aside for a loss or obligation that is certain to occur but whose exact size you cannot pin down**. It rests on **the principle of prudence**: do not wait for a loss to materialise before you recognise it — recognise it as soon as it becomes probable. Take credit sales. You know a share of your customers will not pay. Rather than waiting for them to go under before booking the loss, you create a **provision** that reflects that likelihood today. Your statements become more honest, and you avoid inflating profits that may evaporate later. ## Provision versus reserve The two are widely confused, but the difference is fundamental: - **A provision**: a charge against expenses to cover a probable loss (a debt provision, a depreciation provision). It reduces profit. - **A reserve**: a slice of profits you have already earned, held back to strengthen the balance sheet or fund expansion — not to absorb a specific loss. It is appropriated after profit has been calculated. In short, a provision comes before profit and reduces it; a reserve comes after profit and allocates it. Confusing the two distorts how you read your own performance. ## Debts that are doubtful to collect When a customer runs badly late, or signs of distress start to show, the debt becomes **doubtful to collect** — not lost yet, but at risk. This is where you create a **provision for doubtful debts** covering an estimated percentage of those receivables, so your statements show that part of your accounts receivable may never come in. The debt stays on the customer's account, but the provision sits against it to reflect a realistic collectible value. ## When a debt becomes bad A debt moves from "doubtful" to **bad** once all hope of collecting it is gone: the customer goes bankrupt, disappears for good, or every legal collection attempt fails. At that point **the debt is written off for real**: it is removed from the customer's account and charged against the provision you built earlier (if there is one), or straight to expenses. The distinction from a provision: a provision is an expectation, a write-off is confirmation that the loss actually happened. ## A worked example of a debt provision A business has accounts receivable of SAR 500,000 and estimates that 4% of it may never be collected: - **Provision for doubtful debts** = 4% × 500,000 = **SAR 20,000**, charged to expenses. - Net receivables on the balance sheet = 500,000 − 20,000 = **SAR 480,000**. If a customer later defaults for good on SAR 7,000, that debt is written off and deducted from the provision — so the new year's profit is not hit by a loss that was already anticipated. ## Common provisions in Saudi businesses Alongside the debt provision, several others are common: - **A provision for end-of-service gratuity**, covering the accumulated obligation to employees. - **An inventory obsolescence provision** for slow-moving or expired goods. - **A warranty provision** for repairs on products sold under warranty. - **A provision for potential litigation**. All of them apply the same principle: recognise a probable loss when it becomes probable, not when it lands. ## How provisions affect your profitability Provisions reduce reported profit in the year you create them. That can feel painful, but it protects you: - **It stops you distributing phantom profits** that were never really earned. - **It gives investors and banks a realistic picture**. - **It prepares the business** to absorb the loss when it arrives, without a shock. Over-providing hides real profits; under-providing inflates fragile ones. Balance and reasonable judgement are the art here. ## How Snad manages your provisions and debts Snad tracks **the ageing of your accounts receivable** and flags the overdue balances that are candidates for a provision, so you can size your doubtful-debt provision on real data rather than guesswork. It also lets you **write off hopeless debts and charge them against the provision**, and it tracks other provisions such as inventory obsolescence and end-of-service gratuity. Your profitability and receivables end up presented honestly, in line with the principle of prudence, without manual calculations. ## Frequently asked questions ### What is a provision in accounting? A provision is an amount you set aside for a loss or obligation that is certain to occur but whose exact size you cannot pin down, applying the principle of prudence. You recognise the loss as soon as it becomes probable rather than when it lands, which makes your statements more honest. ### What is the difference between a provision and a reserve? A provision is a charge against expenses to cover a probable loss, so it reduces profit. A reserve is a slice of profits you have already earned, held back to strengthen the balance sheet. A provision comes before profit and reduces it; a reserve comes after it. ### What is the difference between a doubtful debt and a bad debt? A doubtful debt is at risk but not lost yet, so you create a provision against it. A bad debt is one where all hope of collection is gone — bankruptcy or the customer disappearing — so it is genuinely written off the customer's account. ### How do I calculate the provision for doubtful debts? You estimate the share of your accounts receivable that may not be collected, based on debt ageing and your collection history. If your receivables are 500,000 and you estimate 4% is uncollectible, the provision is SAR 20,000, charged to expenses. ### What are the most common provisions in businesses? The provision for doubtful debts, the provision for end-of-service gratuity, the inventory obsolescence provision for slow-moving goods, the warranty provision for repairs on products sold under warranty, and the provision for potential litigation. ### Why do provisions reduce reported profit? Because they recognise a probable loss early. That stops you distributing phantom profits that were never earned, gives investors and banks a realistic picture, and prepares the business to absorb the loss when it arrives without a shock. --- ## About the publisher **Snad (سند)** — a private Saudi software company based in Riyadh, founded 2025. Legal form: Sole proprietorship. Commercial registration: 7038154642 VAT number: 310959226500003 Only official domain: snad.io > Snad is a private commercial business-management platform. It is not a > government body, not a bank, and not a government services portal, and it > is not affiliated with any government entity. Any site or app with a > similar name is unrelated to Snad.