In banking as in other businesses, but particularly in banking, it is obviously inadvisable to keep questionable loans or other assets on the books with figures in excess of what they are considered worth. In times of retrenchment, such as that which occurred on a great scale during 1921, some customers find it difficult or impossible to meet their loan obligations. Such items must be charged off, and the practice among many banks is to charge the undivided profits account and reduce the questionable loan, discount, or other asset accordingly. A better practice, however, is to set up a reserve for contingencies by allotment of undivided profits. The following are the entries required to create a reserve of $5,000 under such an arrangement:

Such a reserve account should be used for one purpose, namely, that of showing all bad debt reductions, expenses in connection therewith, and recoveries thereon. The advantage of a separate account is that the items in question are concentrated in one place and are not lost track of in the undivided profits account, as so frequently happens when they are carried in that account with other items of a diverse nature.