Accounts uncollectible are the receivables that most probably won't be paid. The reason to this can be bankruptcy of borrower, death of borrower, fraud or not being able to prove the debt.
The vendor can sell good for cash or on credit. If the vendor has confidence in customer, he/she can sell on credit. If before paying debt, customer goes bankrupt, the receivable won't be paid. The account becomes uncollectible. The value should be taken away from accounts receivable and in result decrease income.
Companies try to protect themselves against uncollectible accounts. They check standing of customers, limit sales on credit to only the most loyal ones, etc. That however only decreases possibility of occurrence. Other way can be insurance, which decreases consequences of that risk.
- Jackson, S. B., & Liu, X. (2010). The allowance for uncollectible accounts, conservatism, and earnings management. Journal of Accounting Research, 48(3), 565-601.
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