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Accounts receivable is an important asset on the balance sheet. Companies often use the amount...

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Accounting

Accounts receivable is an important asset on the balance sheet. Companies often use the amount of accounts receivable as a collateral against short-term borrowings from banks. Therefore, banks are always cautious in deciding how much money should be lent against the receivables of their borrowers since some of these customers might not be "good receivables" and may not pay the money that is due from them.

So there is always a possibility that some of the customers might not pay back. How do companies account for this possibility? What are the two methods of handling such "bad debts"...also referred to as "uncollectible accounts"?

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