Accounts uncollectible: Difference between revisions
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'''Accounts uncollectible''' are the [[Trade receivables|receivables]] that most probably won't be paid. They also can be loans or other debts. The reason to this can be bankruptcy of borrower, death of borrower, fraud on the part of the debtor, not being able to prove the debt or an inability to find the debtor. Portion of [[credit sales]] in accounts receivables that [[company]] does not expect to collect from [[customer]] is named uncollectible [[accounts receivable]]. Uncollectible accounts appear in the valuation of receivables, in company's balance sheet (Jackson, S. B., & Liu, X. 2010). | |||
'''Accounts uncollectible''' are the [[Trade receivables|receivables]] that most probably won't be paid. They also can be loans or other debts. The reason to this can be bankruptcy of borrower, death of borrower, fraud on the part of the debtor, not being able to prove the debt or an inability to find the debtor. Portion of [[credit sales]] in accounts receivables that [[company]] does not expect to collect from [[customer]] is named uncollectible [[accounts receivable]]. Uncollectible accounts appear in the valuation of receivables, in company's balance sheet (Jackson, S. B., & Liu, X. 2010). | |||
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. | 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. | ||
[[Balance an account|Balances]] of open accounts must have a reserve for bad debts because not all revenues from sale of [[product]] or services will be collected. | [[Balance an account|Balances]] of open accounts must have a reserve for bad debts because not all revenues from sale of [[product]] or services will be collected. The company must estimate how much [[money]] it will receive and how much it will not receive. Under generally [[Accounting Principles|accounting principles]], we should establishing a write-off for uncollectible accounts receivables which creates a reserve. We get a more realistic value of the asset through reducing net of total accounts receivable by the reserve balance. | ||
== | ==How to protect from accounts uncollectible== | ||
Uncollectible Accounts are almost in every [[company]]. [[Enterprise|Companies]] try to protect themselves against uncollectible accounts. To avoid or minimize it the company should check the solvency of the [[customer]] before he decides to cooperate with that [[customer]]. | Uncollectible Accounts are almost in every [[company]]. [[Enterprise|Companies]] try to protect themselves against uncollectible accounts. To avoid or minimize it the company should check the solvency of the [[customer]] before he decides to cooperate with that [[customer]]. They should check standing of customers, limit sales on credit to only the most loyal ones, etc. This can protect the company from uncollectible accounts. That however only decreases possibility of occurrence. Other way can be [[insurance]], which decreases consequences of that [[risk]] (Ezawa, K. J. & T. Schuermann 1995, p. 157). | ||
It is difficult to determine whether a receivable is uncollectible. Usually the [[company]] may not analyze each account, instead they can specify a [[percentage of sales]] or accounts receivable or they may use a historical trend. | It is difficult to determine whether a receivable is uncollectible. Usually the [[company]] may not analyze each account, instead they can specify a [[percentage of sales]] or accounts receivable or they may use a historical trend. | ||
It is clear that each company is aim to keep accounts uncollectible as low as possible. | It is clear that each company is aim to keep accounts uncollectible as low as possible. | ||
==Examples of Accounts uncollectible== | ==Examples of Accounts uncollectible== | ||
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In conclusion, Accounts uncollectible refers to Trade receivables that are likely to not be paid. There are several other approaches to Accounts uncollectible, including the Allowance Method, Direct Write-Off Method, and Provision Method. | In conclusion, Accounts uncollectible refers to Trade receivables that are likely to not be paid. There are several other approaches to Accounts uncollectible, including the Allowance Method, Direct Write-Off Method, and Provision Method. | ||
== | {{infobox5|list1={{i5link|a=[[Doubtful account]]}} — {{i5link|a=[[Prepaid income]]}} — {{i5link|a=[[Nominal account]]}} — {{i5link|a=[[Contra asset account]]}} — {{i5link|a=[[Closing entry]]}} — {{i5link|a=[[Creative accounting]]}} — {{i5link|a=[[T account]]}} — {{i5link|a=[[Bad debt recovery]]}} — {{i5link|a=[[Trade receivables]]}} — {{i5link|a=[[Efficiency]]}} }} | ||
[[Category:Accounting]] | ==References== | ||
* Cecchini, M., S. Jackson, X. Liu (2012). ''[https://www.researchgate.net/profile/Xiaotao_Liu2/publication/225942728_Do_Initial_Public_Offering_Firms_Manage_Accruals_Evidence_from_Individual_Accounts/links/5440f2d40cf251bced6162e7.pdf Do Initial Public Offering Firms Manage Accruals? Evidence from Individual Accounts]. Review of Accounting Studies, 17(1), 22-40. | |||
* Ezawa, K. J. & T. Schuermann (1995). ''[https://arxiv.org/ftp/arxiv/papers/1302/1302.4945.pdf Fraud/uncollectable debt detection using a Bayesian network based learning system: A rare binary outcome with mixed data structures]''. In P. Besnard & S. Hanks (Eds.), Proceedings of the Eleventh Conference on Uncertainty in [[Artificial intelligence|Artificial Intelligence]] (pp. 157-166). San Francisco, CA: Morgan Kaufmann. | |||
* Jackson, S. B., & Liu, X. (2010). ''[https://www.jstor.org/stable/pdf/40784866.pdf?casa_token=2sfHEsNJv04AAAAA:kqTk2oZSLa4gpDmaDUdcUnMHyU9snlgxXmkEvVlCaWL5WLADtiL_QVIaFuvgyk_IlnHQv7QWjlZxklGa78Voawd-s3Mrc0GixV8wKMEQ4dON_EmyrJ-L The allowance for uncollectible accounts, conservatism, and earnings management]''. Journal of Accounting Research, 48(3), 565-601. | |||
[[Category:Accounting]] | |||
{{a|Iwona Tuleja}} | {{a|Iwona Tuleja}} | ||
Latest revision as of 16:16, 17 November 2023
Accounts uncollectible are the receivables that most probably won't be paid. They also can be loans or other debts. The reason to this can be bankruptcy of borrower, death of borrower, fraud on the part of the debtor, not being able to prove the debt or an inability to find the debtor. Portion of credit sales in accounts receivables that company does not expect to collect from customer is named uncollectible accounts receivable. Uncollectible accounts appear in the valuation of receivables, in company's balance sheet (Jackson, S. B., & Liu, X. 2010).
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.
Balances of open accounts must have a reserve for bad debts because not all revenues from sale of product or services will be collected. The company must estimate how much money it will receive and how much it will not receive. Under generally accounting principles, we should establishing a write-off for uncollectible accounts receivables which creates a reserve. We get a more realistic value of the asset through reducing net of total accounts receivable by the reserve balance.
How to protect from accounts uncollectible
Uncollectible Accounts are almost in every company. Companies try to protect themselves against uncollectible accounts. To avoid or minimize it the company should check the solvency of the customer before he decides to cooperate with that customer. They should check standing of customers, limit sales on credit to only the most loyal ones, etc. This can protect the company from uncollectible accounts. That however only decreases possibility of occurrence. Other way can be insurance, which decreases consequences of that risk (Ezawa, K. J. & T. Schuermann 1995, p. 157).
It is difficult to determine whether a receivable is uncollectible. Usually the company may not analyze each account, instead they can specify a percentage of sales or accounts receivable or they may use a historical trend. It is clear that each company is aim to keep accounts uncollectible as low as possible.
Examples of Accounts uncollectible
- Bankruptcy: When a company or individual is unable to pay their debts, they may declare bankruptcy. This means that the debtor is no longer responsible for the debt and the creditor is unable to collect the unpaid debt.
- Death of borrower: If a borrower passes away, their debt may be uncollectible. In this case, the creditor is not able to recover the unpaid debt from the deceased borrower.
- Fraud: If a debtor commits fraud, they may be unable to pay the debt they owe. In this case, the creditor is not able to collect the unpaid debt.
- Inability to prove the debt: If a creditor is unable to provide proof of the debt owed, the debtor may not be responsible for paying the debt.
- Inability to find the debtor: If a creditor is unable to track down the debtor, they may be unable to collect the unpaid debt.
Advantages of Accounts uncollectible
A major advantage of accounting for uncollectible accounts is that it helps a business to accurately reflect its financial position. This is done by removing the receivables from the balance sheet, thus providing a more accurate picture of the company's current financial standing. Additionally, accounting for uncollectible accounts enables a business to remain compliant with accounting standards and applicable laws. Furthermore, by taking account of uncollectible accounts, businesses can more accurately forecast their future cash flows, as well as plan for potential losses. Finally, accounting for uncollectible accounts enables a business to take proactive measures to reduce their risk of bad debts and minimize the potential losses they may incur. *Accurately reflect financial position*Comply with accounting standards and applicable laws*Accurately forecast future cash flows*Plan for potential losses*Reduce bad debt and minimize potential losses.
Limitations of Accounts uncollectible
- The main limitation of accounts uncollectible is that it is difficult to accurately predict when a receivable will become uncollectible. Companies must make estimates about the amount of uncollectible receivables, which can lead to inaccurate financial reporting.
- Another limitation is that accounts uncollectible often require businesses to write off the debt and take a loss, which can have a significant effect on the company's bottom line.
- Finally, accounts uncollectible can lead to a cash flow crunch if the company doesn't have the resources to cover the losses. This can lead to a lack of liquidity, making it difficult for the business to cover its operational costs.
In addition to Trade receivables, there are other approaches related to Accounts uncollectible. These include:
- Allowance Method: Under this method, a company estimates the amount of uncollectible receivables and sets up a contra asset account known as Allowance for Doubtful Accounts. This account is then deducted from accounts receivable to arrive at the net realizable value of the receivables.
- Direct Write-Off Method: This method involves writing off the uncollectible receivables directly against accounts receivable. This method is only used once the company has determined that the receivable is uncollectible and cannot be recovered.
- Provision Method: This method involves estimating the amount of uncollectible receivables and creating a provision for bad debts, which is recorded as an expense in the income statement.
In conclusion, Accounts uncollectible refers to Trade receivables that are likely to not be paid. There are several other approaches to Accounts uncollectible, including the Allowance Method, Direct Write-Off Method, and Provision Method.
| Accounts uncollectible — recommended articles |
| Doubtful account — Prepaid income — Nominal account — Contra asset account — Closing entry — Creative accounting — T account — Bad debt recovery — Trade receivables — Efficiency |
References
- Cecchini, M., S. Jackson, X. Liu (2012). Do Initial Public Offering Firms Manage Accruals? Evidence from Individual Accounts. Review of Accounting Studies, 17(1), 22-40.
- Ezawa, K. J. & T. Schuermann (1995). Fraud/uncollectable debt detection using a Bayesian network based learning system: A rare binary outcome with mixed data structures. In P. Besnard & S. Hanks (Eds.), Proceedings of the Eleventh Conference on Uncertainty in Artificial Intelligence (pp. 157-166). San Francisco, CA: Morgan Kaufmann.
- Jackson, S. B., & Liu, X. (2010). The allowance for uncollectible accounts, conservatism, and earnings management. Journal of Accounting Research, 48(3), 565-601.
Author: Iwona Tuleja
