What Are Accounts Uncollectible?
Accounts uncollectible are receivables, loans or other debts that have virtually no chance of being paid. An account may become uncollectible for many reasons, including the debtor's bankruptcy, an inability to find the debtor, fraud on the part of the debtor, or lack of proper documentation to prove that debt exists.
Accounts Uncollectible Explained
When a customer purchases goods on credit with its vendor, the amount is booked by the vendor under accounts receivable. The payment terms vary, but 30 days to 90 days is normal for most companies. If a customer has not paid after three months, the amount may be assigned under "aged" receivables, and if more time passes the vendor could classify it as a "doubtful" account. At this point, the company may choose to take a charge on its income statement in the form of allowance (or provision) for bad debt. Simultaneously, on a T-account it would debit the bad debt amount and credit allowance for doubtful accounts. Once the company realizes that the bad debt will not be paid, it will finally write it off with journal entries of debit to allowance for doubtful accounts and credit to accounts receivable.
Example of Accounts Uncollectible
Harley-Davidson, Inc. reported a 36% increase in its provision for credit losses in fiscal year 2016 due to "deteriorating performance across the portfolio, lower used motorcycle values at auction, and continued unfavorable performance in oil-dependent areas." Of the $137 million in provisions for credit losses, the company deemed $107 million as accounts uncollectible and subsequently charged off that amount, net of recoveries.