Question

D.Q. 4.3. What does it mean to write off an uncollectible account? Why would companies do this? What effect does delinquency have on a company's credit rating?

Answer 1

1. When Companies sell their product to customers on credit, the customer receives the product and agrees to pay a letter. Seeling Company needs to record customer's obligation's in account receivable on the balance sheet. However, sometimes customers don't pay their bills. when customers don't pay their bills selling company has to write off the amount as bad debts or uncollectible accounts.

2. As per accrual accounting events are recorded when it is recognized to show the correct asset value of a company. If bad debts not written off would still be included under debtors in the balance sheet thereby implying that this amount is recoverable. And this would be an overstating asset of the company. Therefore in order to present a true and fair balance sheet, they need to be written off or a provision needs to be made in case some debts are doubtfull but have not become bad yet.

3. Delinquency can led to serious implications to the company's credit rating, the company's financial health and it is important to maintain and manage the company's credit rating. It may prevent the company from getting the line of credit from suppliers or it may be drastically affected company's bottom line moreover your workforce may also be affected due to delinquency if company is unable to offer a bonus, salary increment and provide insurance. Losing a good and talented employee. delinquency also affects the company's growth and poor credit rating prevents getting from investors, suppliers and at the time of borrowing loans from the bank.