Provisions for Credit Notes & Doubtful Debts: Codes 1105 & 1106

The total sitting in Debtors rarely all gets collected in full — some customers will dispute an invoice and get a credit note, others simply won't pay. Rather than wait and be surprised, Sage lets a business build a provision against both possibilities up front.

The two codes, and what each one holds

Code 1105 — Provision for Credit Notes estimates future credit notes expected to be issued against sales already recorded, reducing Debtors without altering any individual customer's account.

Code 1106 — Provision for Doubtful Debts estimates debts that may never be collected at all, bringing Debtors down to a more realistic, recoverable figure. Both are contra-asset accounts and, unlike most asset codes, normally carry a credit balance — increasing the provision is a credit entry, releasing it is a debit entry.

A worked example

Say a business has £50,000 sitting in Debtors Control Account at year end. Based on past experience, it expects around 2% of that to eventually be written off as bad debt, and separately expects £800 of credit notes for a batch of goods a customer is likely to return.

Provision for Doubtful Debts (code 1106): £1,000 credited (2% of £50,000), reducing the net Debtors figure shown on the balance sheet.

Provision for Credit Notes (code 1105): £800 credited for the expected returns.

Net Debtors reported: £50,000 − £1,000 − £800 = £48,200 — a more realistic figure than the raw £50,000 total.

Why this matters day to day

Reporting the full £50,000 as if every penny will be collected overstates the business's assets and its profit. Reviewing and adjusting these provisions regularly — rather than setting them once and forgetting them — keeps the balance sheet realistic and avoids a nasty surprise write-off much later when a bad debt is finally confirmed.