Uncollectible A/R

Last Updated: Jun 7, 2019

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Uncollectible accounts receivable is used to describe the portion of credit sales in accounts receivable the company does not expect to collect from a customer. Unfortunately, not all customers that make purchases on credit will pay companies the money owed.

Uncollectible accounts is used in the valuation of accounts receivable, which appears on a company's balance sheet. The matching principle requires companies align revenues with expenses in the current accounting period. Therefore, companies must adjust accounts receivable for the anticipated write off expense associated with uncollectible accounts. Companies will normally use the methods below to adjust for uncollectible accounts:

Direct Write-off Method: records bad debt expense in the same accounting period the company determines it will not collect the money owed. The direct write-off method does not require the company to perform estimates, since it will be based on factual reports.

This method is used for federal income tax purposes, which allows companies to expense bad debts after write off occurs. Since the company may attempt to collect money owed for several months, the direct write-off method violates the matching principle, and should not be used when valuing accounts receivable in financial statements.

Allowance Method: records an estimate of bad debt expense in the same accounting period as the sale. The allowance method aligns with two important accounting guidelines. It follows the matching principle, which states revenues generated in an accounting period need to be matched with the expenses incurred in that same accounting period. It also abides by the conservatism constraint, which states when in doubt, report information that does not overstate income or assets or does not understate expenses or liabilities.