Uncollectible accounts are receivables that have virtually no chance of being paid. Accounts may become uncollectible for many reasons. Some of these are the inability of debtors to make payments within the due time or failure to make payments altogether. They may also include the inability to find the debtors, or the lack of proper documentation to prove the existence of debts.
Understanding Uncollectible Accounts
When customers purchase goods or services on credit from a provider, the amount is booked as accounts receivable management. The terms of payments for these accounts may vary for different organizations, but the general time frame is between 30 to 90 days.
When customers end up not paying within three months, their payable amounts may be assigned as “aged” receivables. If further time passes away without payment, the provider could classify them as “doubtful” accounts. In such a situation, an organization may doubt the receivability of all or part of the amount of these accounts, and therefore, debit the bad debt amount and credit allowance for doubtful 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. An increase in bad debt expenses reduces profits. Uncollectible accounts can provide a significant amount of insight into a company’s customers and its lending practices.
Reducing Uncollectible Accounts
Fortunately, uncollectible accounts are not impossible to avoid. An effective collections process with the right customer engagement can be a great way to do that, especially when it comes to late-stage collections. Partnering with an experienced and effective debt collection agency can go a long way to prevent your doubtful accounts from becoming accounts that are uncollectible.
Bad debts can have a significant impact on a company’s financial statements. For this reason, it is important for businesses to carefully consider whether or not to write off an uncollectible account. In some cases, it may be better to continue to carry the debt on the books in hopes that the debtor will eventually pay. However, if there is little chance of collecting the debt, it is usually best to write it off and move on. Because uncollectible accounts are an unfortunate reality for many businesses. They can cause financial difficulties and may even lead to bankruptcy. For this reason, it is important for businesses to carefully consider their options before writing off an uncollectible account. Perhaps, it is also suggestible to not let accounts turn into uncollectibles in the first place itself.
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Also read: What is Account Receivables and How to Reduce it?