reserve for losses

reserve for losses

An accounting entry made to set aside a fund for payment of possible future liabilities as a result of litigation or similar claims. If a tenant is injured after falling from a defective balcony at an apartment,that tenant might sue for damages.The apartment complex might have liability insurance, but there could be a very large deductible. If there is no doubt about the fall, no doubt about the landlord's liability,and the only issue is regarding the size of the check to the tenant,the landlord knows he or she will eventually have to pay up to the deductible limits for the injury. As a result,the landlord will probably set aside a reserve for losses in that amount.

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Section 166 (and related IRC sections 585 and 593) allow mortgagees using the reserve method of accounting for bad debts to charge the loss to the reserve for losses on qualifying real property loans.
If the reserve method is used, however, the mortgagee credits the gain to the reserve for losses on qualifying real property loans.