There is no set rule as to when an account becomes uncollectible. Determining when an account is uncollectible involves a judgment call based on the customer’s payment history and ability to pay. It is important to consider all the factors when assessing when an account becomes uncollectible.
Understanding Uncollectible Accounts Receivable
Uncollectible accounts receivable (UAR) are debts that are no longer expected to be paid. This means that a customer is not likely to pay an invoice or a business has deemed the debt to be uncollectible. UAR is also known as bad debt, as it cannot be collected.
When to Write Off Uncollectible Accounts Receivable
Uncollectible accounts receivable should be written off when it is determined that the customer will not be able to pay the invoice or if the debt is considered uncollectible. The exact time when the account is written off depends on the company’s policies and procedures as well as the amount of the debt. Generally, if the debt is substantial, it should be written off sooner rather than later. Companies should regularly review their accounts receivable to assess which accounts may be uncollectible.
Accounting for Uncollectible Accounts Receivable
When an account is written off as uncollectible, the asset is removed from the company’s balance sheet and an expense is recognised. This expense is known as a bad debt expense and is usually recorded in the company’s income statement. The amount of the bad debt expense is based on the amount of the uncollectible account. Companies should keep accurate records of their accounts receivable, as well as any accounts that have been written off. This will help to ensure that the company is prepared for any future uncollectible accounts.
In conclusion, it can be difficult to determine when an account becomes uncollectible. Companies should assess each account individually, taking all factors into consideration. Uncollectible accounts should be written off when it is determined that the customer will not be able to pay the invoice or if the debt is considered uncollectible. When an account is written off, the asset is removed from the company’s balance sheet and an expense is recognised. Companies should keep accurate records of their accounts receivable, as well as any accounts that have been written off. By properly assessing and accounting for uncollectible accounts receivable, companies can better protect their financial interests.