BMO and Scotiabank Demonstrate How Preparing for Bad Loans Affect Profitability
Profits dip as BMO and Scotiabank set aside hundreds of millions to cover bad loans.
Accounts Receivables (A/R)1 represents Sales earned by a company for which payment has not yet been made by the customer.
Allowance for Doubtful Accounts represents an amount (%) of A/Rs that are considered uncollectible. This allowance reduces the total A/R on the Balance Sheet. A corresponding entry is made on the Income Statement as Bad Debt Expense.
“The drop in profit comes because the Bank set aside a lot more money to cover potentially bad loans. Known as provisions for credit losses…” (PCLs). The PCLs represent the Allowance for Doubtful Accounts.
Banks are in the business of lending money (making loans), which represents their Sales and A/Rs. The PCLs represent the A/R they potentially will not collect. The related increase in the Bad Debt Expense reduces profits.
Profits dip as BMO and Scotiabank set aside hundreds of millions to cover bad loans, CBC, May 2023.
1. Accounts Receivables (A/Rs) are current assets since they are converted to cash (provide value when payment is collected) within 12 months. Typically A/Rs are collected within 30 days from the date of the sale. A/Rs that have not been collected in 90 days have a higher risk of not being collected, and in some cases are classified as uncollectible. Learn more about this subject here What Is Bad Debt? (Investopedia).
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