Definition
An uncollectible account refers to a customer account that cannot be collected due to the customer’s unwillingness or inability to pay. When it becomes apparent that a receivable is uncollectible after multiple collection attempts, a business may write off the receivable as worthless. This process involves removing the uncollectible amount from accounts receivable and recognizing it as a bad debt expense.
Examples
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Retail Store Write-off: A retail store lists a $500 account receivable from a customer who declared bankruptcy. After failed collection efforts, the store writes off the receivable as an uncollectible account.
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Service Provider Write-off: A consulting company has a $1,200 receivable from a client who has repeatedly ignored payment requests. The company classifies the receivable as uncollectible and records a bad debt expense.
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Real Estate Agency Write-off: A real estate agency cancels a $2,000 commission receivable due from a client whose business collapsed. The receivable is written off as an uncollectible account.
Frequently Asked Questions
1. When should an account be considered uncollectible?
An account is considered uncollectible when after several collection attempts, it becomes clear that the customer is unable or unwilling to pay.
2. How is an uncollectible account written off?
An uncollectible account is written off by removing the receivable from accounts receivable and recording a bad debt expense.
3. What happens if a customer eventually pays an amount written off as uncollectible?
If a customer pays an amount previously written off, the amount is recovered and credited back to bad debts recovery.
4. Why do businesses need to write off uncollectible accounts?
Businesses need to write off uncollectible accounts to reflect the accurate financial status and to comply with accounting principles.
5. Can efforts to collect an uncollectible account continue after writing it off?
Yes, businesses can continue to attempt to collect funds from an uncollectible account even after it has been written off.
- Bad Debt: An expense recorded to account for receivables that cannot be collected.
- Accounts Receivable: The money owed to a business by its customers for goods or services provided on credit.
- Write-off: The process of designating an asset as having no value.
- Allowance for Doubtful Accounts: A contra-asset account that reduces the total accounts receivable to the amount expected to be collected.
- Receivables Aging Report: A report that classifies accounts receivable according to the length of time they have been outstanding.
Online References
Suggested Books for Further Studies
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- Financial Accounting: Tools for Business Decision Making by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- Accounting Principles by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
Fundamentals of Uncollectible Account: Accounting Basics Quiz
### What is an uncollectible account?
- [ ] An account that still has a chance of being collected.
- [x] An account that cannot be collected due to the customer's inability or unwillingness to pay.
- [ ] An account with a payment delay.
- [ ] An account that has been paid twice.
> **Explanation:** An uncollectible account is an account that cannot be collected due to the customer's inability or unwillingness to pay, despite several collection attempts.
### When should an account be written off as uncollectible?
- [ ] After the due date.
- [x] After multiple collection attempts and clear evidence of inability or unwillingness to pay.
- [ ] As soon as the invoice is issued.
- [ ] When the customer requests it.
> **Explanation:** An account should be written off as uncollectible after multiple collection attempts and clear evidence that the customer is unwilling or unable to pay.
### How is an uncollectible account recorded?
- [x] As a bad debt expense.
- [ ] As an accounts payable.
- [ ] As a sales return.
- [ ] As an inventory write-down.
> **Explanation:** An uncollectible account is recorded as a bad debt expense to reflect the loss in collectible receivables.
### What is the impact of writing off an uncollectible account on the accounts receivable?
- [x] It decreases accounts receivable.
- [ ] It increases accounts receivable.
- [ ] It has no impact.
- [ ] It increases inventory.
> **Explanation:** Writing off an uncollectible account decreases accounts receivable by removing the amount deemed uncollectible.
### What should a business do if a customer pays an amount that was previously written off?
- [ ] Ignore the payment.
- [x] Credit the amount as bad debts recovery.
- [ ] Record it as a sales discount.
- [ ] Add it to the current invoices.
> **Explanation:** If a customer pays an amount previously written off, it should be credited as bad debts recovery.
### Can efforts to collect continue after an account has been written off?
- [x] Yes, efforts can continue.
- [ ] No, efforts must stop.
- [ ] Only if the amount is below a certain threshold.
- [ ] It depends on the loan terms.
> **Explanation:** Efforts to collect can continue even after an account has been written off.
### What account is used to offset accounts receivable for potential uncollectible amounts?
- [ ] Inventory.
- [ ] Accounts payable.
- [x] Allowance for doubtful accounts.
- [ ] Depreciation.
> **Explanation:** The allowance for doubtful accounts is a contra-asset account used to offset accounts receivable for potential uncollectible amounts.
### What is the journal entry to write off an uncollectible account?
- [ ] Debit Cash, Credit Bad Debt Expense.
- [x] Debit Bad Debt Expense, Credit Accounts Receivable.
- [ ] Debit Accounts Receivable, Credit Sales.
- [ ] Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts.
> **Explanation:** The journal entry to write off an uncollectible account is to debit Bad Debt Expense and credit Accounts Receivable.
### Which financial statement is affected by writing off an uncollectible account?
- [x] The income statement.
- [ ] The balance sheet only.
- [ ] The statement of cash flows.
- [ ] The inventory report.
> **Explanation:** Writing off an uncollectible account affects the income statement by increasing bad debt expense.
### What term describes the report that classifies accounts receivable according to their age?
- [x] Receivables aging report.
- [ ] Inventory turnover report.
- [ ] Cash flow statement.
- [ ] Depreciation schedule.
> **Explanation:** The receivables aging report classifies accounts receivable according to the length of time they have been outstanding.
Thank you for navigating through the intricacies of uncollectible accounts and challenging yourself with our comprehensive quiz. Keep enhancing your accounting acumen!
