PBD FULL FORM IN BANKING

In this article you get to know about PBD full from and other different abbreviations of PBD in various fields. PBD full form refers to Provision for Bad Debts.

Provision for bad debts is an accounting concept that refers to the amount of money that a company sets aside to cover losses resulting from non-payment of debts. When a company sells goods or services on credit, there is always a risk that the customer may not be able to pay the debt. This risk is known as credit risk, and it is a significant concern for businesses of all sizes. To mitigate this risk, companies must set aside a provision for bad debts to ensure they have the necessary funds to cover any losses resulting from non-payment of debts. In this article, we will explore the concept of provision for bad debts in more detail, including its purpose, calculation methods, and best practices.

Purpose of Provision for Bad Debts

The primary purpose of provision for bad debts is to ensure that a company has adequate funds to cover any losses resulting from non-payment of debts. When a company sells goods or services on credit, there is always a risk that the customer may default on the payment. This risk is particularly significant in industries where credit is extended for a long period, such as banks and financial institutions. To protect themselves against this risk, companies must set aside a provision for bad debts.

The provision for bad debts serves several purposes, including:

Helps to mitigate credit risk: By setting aside a provision for bad debts, companies can mitigate the risk of non-payment by ensuring they have the necessary funds to cover any losses resulting from default.

Ensures compliance with accounting standards: In accordance with accounting standards such as IFRS 9 and US GAAP, companies are required to set aside a provision for bad debts. Failing to comply with these standards can result in penalties and legal consequences.

Provides a more accurate picture of the company’s financial health: Setting aside a provision for bad debts allows companies to provide a more accurate picture of their financial health by reflecting the potential losses resulting from non-payment of debts.

Methods of Calculating Provision for Bad Debts

There are several methods of calculating the provision for bad debts, each with its advantages and disadvantages. The most common methods are:

Percentage of Receivables Method: This method involves setting aside a percentage of the company’s accounts receivables to cover potential losses resulting from non-payment of debts. The percentage is determined based on historical data, industry averages, and the company’s credit policy. The advantage of this method is that it is relatively simple and easy to implement. However, it may not accurately reflect the credit risk of individual customers.

Aging of Receivables Method: This method involves categorizing accounts receivable based on the length of time they have been outstanding. The provision for bad debts is then calculated based on the historical percentage of bad debts for each aging category. This method provides a more accurate picture of credit risk for individual customers but can be more complex to implement.

Credit Scoring Method: This method involves using a credit scoring system to assess the credit risk of individual customers. The provision for bad debts is then calculated based on the credit score of each customer. This method provides the most accurate reflection of credit risk but can be expensive and time-consuming to implement.

Best Practices for Provision for Bad Debts

To ensure that the provision for bad debts accurately reflects the credit risk of the company, there are several best practices that businesses should follow:

Regularly review and update the provision for bad debts: The provision for bad debts should be reviewed regularly to ensure that it accurately reflects the credit risk of the company. Factors such as changes in economic conditions, customer payment patterns, and credit policy should be taken into account when reviewing the provision.

Use a combination of calculation methods: To ensure that the provision for bad debts accurately reflects the credit risk of the company, it is recommended to use a combination

Different abbreviations of PBD in various fields are as follows

CONCLUSION:

Dear reader in this article you get to know about PBD full from and PBD term used in various other fields, If you have any query regarding this article kindly comment below.