What Are Accounts Uncollectible?
Accounts uncollectible are receivables, loans, or other debts that have virtually no chance of being paid. An account may become uncollectible for many reasons, including the debtor's bankruptcy, an inability to find the debtor, fraud on the part of the debtor, or lack of proper documentation to prove that debt exists.
Key Takeaways
- Accounts uncollectible are receivables, loans, or other debt that will not be paid by a debtor.
- Reasons for accounts uncollectible relate to bankruptcy or a refusal to pay by the debtor.
- Goods sold on credit usually have a 30 to 90 day time period in which to be made whole.
- When receivables or debt will not be paid, it will be written off, with the amounts credited to accounts receivable and debited to allowance for doubtful accounts.
Understanding Accounts Uncollectible
When a customer purchases goods on credit with its vendor, the amount is booked by the vendor under accounts receivable. The payment terms vary, but 30 days to 90 days is normal for most companies.
If a customer has not paid after three months, the amount may be assigned under "aged" receivables, and if more time passes, the vendor could classify it as a "doubtful" account. At this point, the company believes that receiving all or part of the outstanding amount is doubtful, and will, therefore, debit the bad debt amount and credit allowance for doubtful accounts.
For bookkeeping, it will write off the amount with journal entries as a debit to allowance for doubtful accounts and credit to accounts receivable. When it is confirmed that the company will not receive payment, this will be reflected in the income statement with the amount not collected as bad debt expense. Increasing a bad debt expense reduces profits.
Accounts uncollectible can provide a significant amount of insight into a company's lending practices and its customers. For example, if a company notices that its accounts uncollectible are either remaining steady or increasing, it is extending credit to risky customers and therefore should improve its vetting measures.
Example of Accounts Uncollectible
Let's say Barry and Sons Boot Makers sold $5 million worth of boots to many customers. Barry and Sons Boot Makers would record revenues of $5 million and accounts receivable of $5 million. For simplicity's sake, we'll assume all sales were made on credit. Of that $5 million in sales, $1 million was from Fancy Foot Store.
Fancy Foot Store declares bankruptcy and it is uncertain if they will be able to pay the $1 million. Barry and Sons Boot Makers shows $5 million in accounts receivable but now also $1 million in allowance for doubtful accounts, which would be $4 million in net accounts receivable.
It's eventually determined that Fancy Foot Store had creditors in line that received all assets as priority lenders, therefore, Barry and Sons Boot Makers will not be receiving the $1 million. The entire amount is written off as bad debt expense on the income statement and the allowance for doubtful accounts is also reduced by $1 million.
FAQs
Accounts uncollectible are receivables, loans, or other debts that have virtually no chance of being paid. An account may become uncollectible for many reasons, including the debtor's bankruptcy, an inability to find the debtor, fraud on the part of the debtor, or lack of proper documentation to prove that debt exists.
What is the uncollectible accounts expense? ›
Uncollectible Accounts Expense, also known as Bad Debt Expense or Doubtful Accounts Expense, is an expense account representing the estimated amount of accounts receivable that a business expects it will not be able to collect.
How do you record uncollectible accounts? ›
Record the journal entry by debiting bad debt expense and crediting allowance for doubtful accounts. When you decide to write off an account, debit allowance for doubtful accounts and credit the corresponding receivables account.
What happens when an account becomes uncollectible? ›
Uncollectible accounts refer to customer accounts that originated from sales on credit that have become uncollectible because customers did not meet their payment obligations. These accounts lead to losses for the company.
How do companies generally handle uncollectible accounts? ›
For keeping records, these amounts are made entries as a debit to allowance for doubtful accounts and as a credit to accounts receivables. If the organization confirms that it will not receive payment on these accounts, it gets reflected in the income statement with the uncollected amount as a bad debt expense.
What is considered an uncollectible account? ›
Accounts uncollectible are receivables, loans, or other debts that have virtually no chance of being paid. An account may become uncollectible for many reasons, including the debtor's bankruptcy, an inability to find the debtor, fraud on the part of the debtor, or lack of proper documentation to prove that debt exists.
What is the expense of an uncollectible account? ›
The expense of an uncollectible account should be recorded in the accounting period that the account becomes uncollectible. The account, Allowance for Uncollectible Accounts, has a normal credit balance. A business usually knows at the end of the fiscal year which customer accounts will become uncollectible.
What happens when you write off accounts as uncollectible? ›
When a specific customer's account is identified as uncollectible, the journal entry to write off the account is: A credit to Accounts Receivable (to remove the amount that will not be collected) A debit to Allowance for Doubtful Accounts (to reduce the Allowance balance that was previously established)
How do you estimate uncollectible accounts? ›
The allowance for uncollectible accounts is calculated by multiplying the receivable balance in the various aging categories (see table below) by a reserve rate. A higher reserve rate is applied to older receivables because those receivables are less likely to be collected.
What is the adjusting entry for uncollectible accounts? ›
Question: The adjusting entry for uncollectible accounts requires a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
Answer and Explanation: If an entity does not record bad debts, the expenses are understated and he or she may end up having to pay the extra income tax due to high net income.
Which account is generally credited when recording uncollectible accounts? ›
If a specific account becomes uncollectible, it will debit allowance for doubtful accounts and credit accounts receivable. The direct write-off method, is not an estimate, but rather a realized bad debt, for which a debit to bad debt expense and a credit to accounts receivable is made.
What is a charge off of uncollectible accounts? ›
A charge-off is an unpaid debt that a bank or lender writes off as a loss, because it no longer expects to be able to collect the money. The creditor may sell the debt to a collections agency, and you will still owe the money.
What are the two methods for uncollectible accounts? ›
There are two fundamental methods for handling these uncollectible accounts: the direct write-off method and the allowance method.
How do you record uncollectible? ›
The direct write-off method delays recognition of bad debt until the specific customer accounts receivable is identified. Once this account is identified as uncollectible, the company will record a reduction to the customer's accounts receivable and an increase to bad debt expense for the exact amount uncollectible.
What is the allowance for uncollectible accounts? ›
Allowance for uncollectible accounts is a contra asset account on the balance sheet representing accounts receivable the company does not expect to collect. When customers buy products on credit and then don't pay their bills, the selling company must write-off the unpaid bill as uncollectible.
Is an uncollectible account an operating expense? ›
Bad debts are an operating expense.
How do you calculate uncollectible accounts? ›
The allowance for uncollectible accounts is calculated by multiplying the receivable balance in the various aging categories (see table below) by a reserve rate. A higher reserve rate is applied to older receivables because those receivables are less likely to be collected.
What type of allowance is uncollectible accounts? ›
An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The allowance, sometimes called a bad debt reserve, represents management's estimate of the amount of accounts receivable that will not be paid by customers.
