Charge-offs are uncollectible credits that are removed from accounts receivable to calculate current balance. The use of a discount does not mean the debt will not be collected, and bad debt is typically written off. Companies may use discounts to identify unpaid invoices and may turn them over to collection agencies. Discounting helps keep accounts receivable figures current.
Charge-offs are credits that were previously recorded as accounts receivable in accounting records, but are now considered uncollectible for some reason. The purpose of the discount is to allow a controlled procedure to take place that excludes the inclusion of uncollected credit in calculating the current balance in Accounts Receivable. Thus, a discount is a simple cancellation that removes an item from the anticipated net income.
The discount does not mean that there will be no more attempts to collect on the debtor’s outstanding debt. In contrast, the use of a discount simply means that the amount owed will no longer be reflected in Accounts Receivable for the purpose of determining how much revenue remains to be collected from outstanding invoices issued to customers. Any invoices that are charged or canceled in the main Accounts Receivable section will remain in the company’s general financial records. Typically, the amount written off is known as bad debt.
Many companies have a policy of using the discount to identify outstanding invoices that remain unpaid long after payment is due. To avoid using a discount, companies may choose to send periodic reminders up to 120 days after the invoice due date. After that point, the invoice may be canceled, removed from accounts receivable, and turned over to a collection agency for further action.
In the event that the collection agency is able to secure payment of a delinquent invoice, the company will often create an amended invoice or other instrument to allow receipt of the value of the original invoice, less any fees charged by the collection agency. The original discount is not normally reversed, although some companies prefer to follow that procedure and simply modify the balance to match the amount collected and sent by the collection agency.
Discounting is a useful way to remove a bad debt from a corporation’s accounting records. This approach helps keep the current Accounts Receivable figure current and provides the business owner with realistic figures for what revenue can reasonably be anticipated in the next one to three months.
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