What Are Accounts Uncollectible?

Definition

• Accounts uncollectible refer to receivables, loans, or other debts that have virtually no chance of being paid.
• These accounts arise due to various reasons such as debtor's bankruptcy, inability to locate the debtor, fraud, or lack of documentation.

Key Takeaways

• Accounts uncollectible are debts that will not be paid by a debtor.
• Common causes include bankruptcy or refusal to pay by the debtor.
• Goods sold on credit usually allow a 30 to 90-day payment period.
• Unpaid receivables or debt are written off with credits to accounts receivable and debits to the allowance for doubtful accounts.

Understanding Accounts Uncollectible

• When goods are sold on credit, the amount is recorded under accounts receivable.
• Typical payment terms range from 30 to 90 days.
• Accounts not paid after three months may be classified as "aged" receivables.
• Further non-payment results in classification as a "doubtful" account.
• To write off an amount:
  • Debit the bad debt amount.
  • Credit the allowance for doubtful accounts.
• Confirmed non-collection appears in the income statement as a bad debt expense, reducing profits.
• Accounts uncollectible analysis can reveal insights into a company’s credit extension practices.

Example

• Scenario: Barry and Sons Boot Makers sold $5 million worth of boots, all on credit.
  • $1 million of this was sold to Fancy Foot Store.
  • Fancy Foot Store declared bankruptcy, creating uncertainty around the $1 million payment.
• Accounting Impact:
  • Initial records showed $5 million in accounts receivable.
  • Following bankruptcy, $1 million was placed in the allowance for doubtful accounts.
  • Net accounts receivable became $4 million.
  • Once confirmed that no payment will be received, $1 million is written off as a bad debt expense.
  • The allowance for doubtful accounts is reduced by $1 million.