Uncollectible Accounts

Throughout business operations, there will be times that customers will pay for something on credit, and then end up not being able to pay the company for what they purchased.

This is the nature of working with payments on credit, and while it’s an inconvenience to the company, it’s crucial that businesses account for the potential of this occuring, and in-turn set aside an “allowance” for when this occurs to their customers.

Here in-lies the value of the Allowance for Uncollectible Accounts!

We use the Allowance for Uncollectible Accounts to store an “allowance” of money used in the case of customers not being able to pay us back for their purchases.

Preparing for uncollectible accounts

There are a couple of different ways that company can buckle up for these uncollectible accounts, let’s explore the different avenues!

  • Single Estimated % of Total A/B method
  • Aging method

Single Estimated % of Total A/R method

Simply put…

Single Estimated % of Total A/R method means the company deems X% of their Accounts Receivable to be uncollectible.

For example…

Question: Hats LLC has an Accounts Receivable balance of $500 and an Allowance for Uncollectible Accounts balance of $20 (credit). They estimate 10% of their accounts receivable to be uncollectible.

Calculate updated balance for Allowance for Uncollectible Accounts

In this situation, the “Single Estimated %” is 10%…

Question: Hats LLC has an Accounts Receivable balance of $500 and an Allowance for Uncollectible Accounts balance of $20 (credit). They estimate 10% of their accounts receivable to be uncollectible.

…and the “of Total A/R method” is $500…

Question: Hats LLC has an Accounts Receivable balance of $500 and an Allowance for Uncollectible Accounts balance of $20 (credit). They estimate 10% of their accounts receivable to be uncollectible.

…therefore, our Allowance for Uncollectible Accounts should be $50!

$500 (Total A/R) x 10% (Single Estimated %) = $50

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