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What is the process for handling unpaid Accounts Receivable?
Home » Accounting » Accounts Receivable » What is the process for handling unpaid Accounts Receivable?When an account receivable is unpaid, it is considered a “bad debt.” It is then turned over to the collections department, whose primary function is to collect payments for outstanding debt. This department will add it to their list of accounts receivable until that amount is paid by the customer. Smaller businesses, which do not have collections departments can choose to make use of a collection agency, which will collect the debt for the original business for a fee or a percentage of the amount collected.
Many businesses will keep in contact with a customer for at least three months before handing that debt over to collections. The collections department or agency, will continue to send correspondence to the customer for a period of time, but if it becomes evident that the debt will not be repaid, then the amount will be removed from the accounts receivable ledger and listed as a an expense on the balance sheet.
Many businesses remove bad debt expenses from their accounts at the end of each fiscal or calendar year. When this happens, the debt is erased. This amount will then be added as a bad debt expense to the line items of the business’s tax return. Other businesses wait two full years before writing off bad debts, while others wait as long as seven years before removing unpaid debt from the books and claiming them on their taxes as bad debt expenses.
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