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Simple English definitions for legal terms
bad-debt reserve
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A quick definition of bad-debt reserve:
A bad-debt reserve is money set aside by a company to cover losses on accounts receivable that are unlikely to be paid. This reserve helps the company prepare for the possibility of not receiving payment from customers and reduces the impact of bad debts on the company's financial statements. It is like putting money in a piggy bank for a rainy day.
A more thorough explanation:
A bad-debt reserve is a type of reserve that is set aside to cover losses on uncollectible accounts receivable. It is a fund of money that a company keeps to protect itself from the risk of customers not paying their bills.
- An insurance company may have a loss reserve to cover estimated future payments for losses that have not yet been reported.
- A bank may have a reserve set aside to cover possible losses from defaulting loans.
- A company may have a bad-debt reserve to cover losses on accounts receivable that are unlikely to be collected.
These examples illustrate how different types of reserves are used to protect companies from financial risks. By setting aside money in reserves, companies can ensure that they have the funds to cover unexpected losses and liabilities.