Accounting for Provision for Loan Losses

If you have the business to provide loan to your customers, provision for loan losses will be helpful for you for growing your business without any tension. Here, you will learn, how can you do accounting for provision for loan losses.

Provision for loan losses means to keep a fund without any use by making it as our annual expense which will deduct from our annual profit. When any customer will not pay our loan, it will be become our bad loan. So, we will use our this fund for giving loan to good parties and suffering other expenses. 

Provision for loan losses will keep on some % on our total given loan and this % is calculated on the basis of our past experience. 

Now you are ready for doing the accounting treatment of provision for loan losses.

First of pass the journal entry of actual bad loan .

1. Entry for recording actual bad loan which did not record in books of business

 Bad Loan account Dr. xxxxx
To Loan to Our customer  Account xxxxxx

2. Entry for transferring bad loan to provision for bad loan  losses Account

 Provision for bad Loan Losses account Dr. xxxxxx
To Bad Loan account xxxxx

3. Transfer of provision for Bad Loan Losses account to profit and loss account

 Profit and loss account Dr. xxxxxx
To Provision for bad Loan Losses account xxxxx

It is not necessary that provision for bad  Loan losses account will go only to the debit side of this account but it may go to the credit side . It will decide after making provision for bad loan losses account which is very easy to make . I am showing you this account . After study of this account you can easily make this account and take the benefits of this provision. This account will be started with credit balance because this is liability account. Now, we will debit actual bad loan in this account. We will show the credit closing balance with new provision for bad loan losses. Now, we will calculate the difference which will be transferred to profit and loss account.