reserve for bad debt

Definition

Money set aside by a company or organization to compensate for a potential increase in debt that might possibly not be paid back. The reserve is created by simultaneously debiting the bad debt expense and by creating a contra-asset by crediting reserves for the bad debt. For example, a university that provides loans to its students will likely be unable to collect all of the outstanding loans, since some students will experience difficulty in repaying all of their debt. The university would create a reserve for bad debt to ensure that an increase in bad debt does not eat into other funds.