Question

Describe the accounting treatment by hospitals and health care organizations for each of the following: Uncollectible accounts

Answer 1

Hospital accounting is a particular system of accounting which accumulates, communicates and interprets historical and projected economic data that are useful for the purpose of ascertaining the financial position and operating results of a hospital. The useful information relating to the activities of a hospital is presented by a statistical form which is historical and, at the same time, projected in nature.

Accounts receivable that cannot be collected are called uncollectible accounts some business refers to uncollectible accounts as bad debt. When an organization no longer is confident that it will be able to collect what it is owed, the circumstances that allowed the transaction to be recognized for revenue purposes no longer exist. Reasons for an organization to assume an account is uncollectible include the other party refuses to pay or the debtor has undergone financial difficulties making it impossible for him to pay.

Before there can be a Bad debt expense or Uncollectible accounts, there must be an Account receivable. This receivable is an amount owed to an entity, usually by one of its customers as a result of a recent sale or service received.  When customer payment becomes overdue on an Account receivable, the organization usually notify the customer of the late status and then watch the overdue account for some timespan. The organization may continue trying to collect the debt. This attempt may include intensified collection efforts, such as using a Collection service or a lawsuit against the non-paying customer. These options, however, can raise the cost of collection substantially. Secondly, the organization may recognize the debt as an uncollectible account and write off the debt. Creditors take this action in the interest of accounting accuracy. A write-off adjusts the seller's Net accounts receivable to reflect the reality. Sellers choose this option when they believe the customer will never pay. They might accept this reality, for instance, when the customer goes out of business or declares bankruptcy.

Crediting the estimated value of uncollectible accounts to a contra account is called the allowance method of recording losses from uncollectible accounts. The difference between an asset's account balance and its related contra account balance is called book value. The difference between the balance of accounts receivable and its contra account, Allowance for uncollectible accounts is called the book value of accounts receivable. The amount of accounts receivable a business expects to collect is called the net realizable value.

Two methods are commonly used to estimate uncollectible accounts receivable:

1. The percent of sales method assumes that a percentage of credit sales will become uncollectible.

2. The percent of accounts receivable method uses an analysis of accounts receivable to estimate the amount that will be uncollectible.

Analyzing accounts receivable according to when they are due is called the aging of accounts receivable. The accounting entry is Uncollectible accounts expense debited to allowance for uncollectible accounts credited. The allowance method of recording losses from uncollectible accounts in the same financial year that the related revenue is recorded.