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 are examples of uncollectible? ›
Uncollectible A/R are amounts of money that a business believes customers will not repay. Nonpayment could result from customers going out of business, being unable to pay, or refusing to pay. In some cases, you might not be able to locate the debtor at all.
How do you determine 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 journal entry for uncollectible accounts? ›
Estimate uncollectible receivables. 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.
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.
How do you write-off uncollectible accounts? ›
The entry to write off the bad account under the direct write-off method is:
- Debit Bad Debts Expense (to report the amount of the loss on the company's income statement)
- Credit Accounts Receivable (to remove the amount that will not be collected)
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.
Can uncollectible accounts be recognized as expense? ›
There are two different methods used to recognize bad debt expense. Using the direct write-off method, uncollectible accounts are written off directly to expense as they become uncollectible. On the other hand, the allowance method accrues an estimate that gets continually revised.
What do uncollectible accounts affect? ›
Uncollectible accounts create ripple effects in your business financials. They skew your revenue projections, lead to discrepancies in financial reporting, and can even mislead stakeholders about the company's financial health.
Based on previous experience, 1% of accounts receivable less than 30 days old will be uncollectible, and 4% of those accounts receivable at least 30 days old will be uncollectible.
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. Uncollectible Accounts Expense and a credit to Allowance for Doubtful Accounts.
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.
What are the two methods of accounting for uncollectible accounts? ›
There are two fundamental methods for handling these uncollectible accounts: the direct write-off method and the allowance method.
How to estimate uncollectible accounts? ›
Percentage-of-receivables method The percentage-of-receivables method estimates uncollectible accounts by determining the desired size of the Allowance for Uncollectible Accounts. Rankin would multiply the ending balance in Accounts Receivable by a rate (or rates) based on its uncollectible accounts experience.
What happens if a company fails to record estimated uncollectible accounts? ›
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.
What happens when debt is uncollectible? ›
Your creditor can still sue you to try to collect the debt if you're uncollectible. But if a creditor gets a judgment against you, the creditor has very few options to collect the debt. A creditor could put a lien on your house if you own it.
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.
What is a write-off of uncollectible debt? ›
A bad debt write-off is the process of removing an uncollectible debt from a business's accounting records. This accounting method acknowledges the loss incurred when a debtor fails to repay a debt.
What is an example of a direct write-off method for uncollectible accounts? ›
Direct Write-off Accounting Example
Assume a company has invoiced its customer for $10,000 but realizes it will not receive payment. It would credit Accounts Receivable and debit Bad Debt Expense in the amount of $10,000 to record this uncollectible debt in its books.
