Bad-debt reserve definition

A bad debt reserve is an estimated amount set aside to cover the amount of debt that is anticipated to be incurred and written off during a period of time. The estimate is typically based on past experience, but could also be based on other factors, such as an anticipated economic downturn.

Such a reserve is used to make a more accurate estimate of current earnings and to balance the write-off when it occurs. As with other types of reserves, it serves to smooth earnings and is a prudent and disciplined management step.