Question

What are loan loss reserves? Using journal entries, show how the reserves are (a) set up, (b) used, (c) written-off,
and (d) reversed/released.

Answer 1

A loan loss reserve is a contra asset account on a banks balancesheet that is netted aganist gross loans.

This is created by bank, the purpose of bad debts reserve for other entities and the purpose of the loan loss reserve for banks are the same.

The banks use this reserve if any customer has became bankrupt then the loss incurred from that customer will be covered using this loan loss reserve.

Journal entries :-

Transaction type	Particulars	Amount	Amount
Set up	loan loss reserve	xxx
	To loan loss provision		xxx
	Loan loss provision	xxx
	To profit & loss		xxx
Used	customer loan	xxx
	To loan loss reserve		xxx
Written off	customer bad debts	xxx
	To loan loss reserve		xxx
Reversed/released	general reserve/retained earnings	xxx
	To loan loss reserve		xxx

These are all the journal entries required to solve the above given question.

If there is any clarifications required regarding the above provided answer, please mention them in comment box.

I hope, all the above provided information and journal entries are useful and helpful to you.

Thank you.