<u>The allowance for </u><u>uncollectible accounts</u> refers to a company that accepts the risk of giving credits to those who may not pay it back. These debts are written off as uncollectable and are a contra asset on the balance reports.
Uncollectable accounts are also often referred to as doubtful accounts. This implies that the company that is giving the credit accepts the possibility that this entity may not return the money. This results in a loss for the company as is recorded as a contra asset on the balance sheets for the company. Some ways for companies to control this loss are:
- Establishing requirements for credits
- Using credit collectors to claim large debts
- Limiting amount of loss permitted based on historical and industry records.
A contra asset or contra account is an account on a companies balance sheet that <u>decreases the balance of certain assets</u>. Contra derives from Latin and means against. Meaning this is an account that goes <u>against the positive balance of the company, </u>it subtracts from the companies earnings.
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