The accounts receivable situation of a firm is often modeled as an absorbing Markov chain.† Suppose a firm assumes that an account is uncollectable if the account is more than three months overdue. Then at the beginning of each month, each account may be classified into one of the following states:

State 1 New account State 2 Payment on account is one month overdue.

State 3 Payment on account is two months overdue.

State 4 Payment on account is three months overdue State 5 Account has been paid.
State 6 Account is written off as bad debt.