Allowance for uncollectibles
Reserve today against the loans you won't collect, and what happens when you write one off.
Lending is a business with losses: part of your portfolio will never come back. The question isn't whether it will happen, it's when you'll acknowledge it. The allowance is acknowledging it before it hurts.
What it's for
Imagine you have RD$100,000 out on the street and you know, from experience, that around 10% never returns. Accounting-wise you have two options:
- Without an allowance: your balance sheet says you have RD$100,000 until the day you write off a RD$30,000 loan. That month your profit collapses all at once, even though the business was doing just as well as always.
- With an allowance: you reserve RD$10,000 from now. Your balance sheet tells the truth (RD$90,000 net), and the blow is absorbed before it arrives.
The allowance is not money you set aside. It is an accounting acknowledgement: you're saying "of this portfolio, this part I already give up for lost". It doesn't move your cash by a single cent.
Account 1290
The reserve lives in 1290 Allowance for Uncollectibles, a special account: it is a contra-asset. It lives among the assets but subtracts instead of adding. So in your Balance Sheet you'll see:
1200 Loan Portfolio | RD$100,000 |
1290 Allowance for Uncollectibles | −RD$10,000 |
Net portfolio | RD$90,000 |
How to set the allowance
- Go to Accounting → Provision.
- You'll see three numbers: your outstanding portfolio, your current allowance and the coverage (what percentage of the portfolio is reserved).
- Type the target you want: the total amount you want the reserve to reach, not how much you're adding to it.
- Save.
Prestafolio computes the delta (the difference against the current reserve) and posts an entry for that difference.
The entry: increasing the reserve
Portfolio RD$100,000, current reserve RD$0, target RD$10,000:
Account | Debit | Credit |
|---|---|---|
5201 Provision Expense | RD$10,000 |
|
1290 Allowance for Uncollectibles |
| RD$10,000 |
Totals | RD$10,000 | RD$10,000 |
A RD$10,000 expense appears (it lowers your profit for the period, which is the whole point) and the reserve goes up RD$10,000.
The entry: lowering the reserve
If you set a target lower than the current reserve, the entry runs backwards: DR 1290 / CR 5201. Reserve is released and part of the expense is reversed.
If the target equals the current reserve, nothing happens: no entry is posted.
The write-off: when the loan is declared lost
Marking a loan as uncollectible triggers the write-off: the loan leaves your portfolio. And this is where the allowance does its job: the write-off consumes the reserve first and only charges to direct loss whatever the reserve doesn't cover.
Example: you write off a loan with RD$30,000 outstanding, holding RD$10,000 of reserve:
Account | Debit | Credit |
|---|---|---|
1290 Allowance for Uncollectibles | RD$10,000 |
|
5202 Write-off Loss | RD$20,000 |
|
1200 Loan Portfolio |
| RD$30,000 |
Totals | RD$30,000 | RD$30,000 |
Read it like this: RD$10,000 of the blow you had already absorbed in earlier months (that's why you only debit the reserve, not a new expense) and RD$20,000 is this month's real loss. Without an allowance, the full RD$30,000 would have landed as loss all at once.
After the write-off: portfolio RD$70,000, reserve RD$0. Time to provision again.
Rules the system enforces
Rule | Why |
|---|---|
The target cannot be negative | A negative reserve means nothing. |
The target cannot exceed your outstanding portfolio | You can't reserve more than you have lent: it would push your net portfolio negative and break the balance sheet. |
Accounting must be active | Without the ledger there is nowhere to post the entry. |
Two adjustments don't clobber each other | If two people adjust the allowance at the same time, they are serialised: the second reads the already-moved reserve. The final target is always the one you asked for. |
How much to provision
Prestafolio does not decide for you: it imposes no percentage. The usual practice is to take your historical loss rate and apply it to the outstanding portfolio, reviewing it at each month-end **before closing the period**: that way the provision expense lands inside the month it belongs to and your Income Statement tells the truth.
Plan and permissions
- Premium plan only (Financial statements module).
- Viewing the allowance status: permission
accounting:read. - Setting the target: permission
accounting:provision, separate, because it moves the ledger and your result for the period. The owner always can.