Accounts Receivable - Net | Push Digits Chartered Accountants

Accounts Receivable – Net

 

Accounts Receivable – Net

Accounts receivable – net can be defined as the amount which is owed by the company from its customers less the provision made for doubtful debts. This is the amount which the company expects to receive from its customers in the future.

Usually, accounts receivable – net/ net receivables are presented as a percentage of total receivables or revenue. A higher percentage of net receivables indicates that an entity has more capability to collect outstanding receivable balances from its customers. For example, a business estimates that 2 percent of its revenue is never going to be received then that company’s net receivables are 98% (100% – 2%) of the total accounts receivable.

The formula used for calculating accounts receivables – net is as follows:

Accounts receivables – net = Accounts receivable – Allowance for doubtful debts  

Understanding Accounts Receivables – Net

Companies use accounts receivable – net to measure the effectiveness of their receivables collection process. They also use it when making future projections pertaining to cash inflows from customers.

Accounts receivable arise when a business offers credit to its customers. An entity’s accounts receivable represents the credit it has offered to its customers against the goods or services it has provided them with. This credit offered by the business allows the customer to make payments against goods purchased or services rendered on a specific date as per the terms and conditions of the credit agreed between the two parties (the business and the customer). In most cases, the credit period offered by entities to their customers ranges from 15 to 30 days.

The practice of extending credit to customers carries an inherent default risk as the entity does not receive payment upfront against goods or services it sells. An entity can improve its receivable cash collections by maintaining tight control over credit offered to customers as well as having efficient and effective collection procedures.   

Allowance for Doubtful Debts

The allowance for doubtful debts is the estimated amount of accounts receivable which an entity anticipates will not be collectible from customers and therefore will have to be written-off in the entity’s books. This estimated amount is subtracted from the total outstanding balance of accounts receivable. Mainly, two methods that are used are the accounts receivable aging method and the percentage of sales method.

Accounts receivable – net is presented on an entity’s balance sheet. The figure of accounts receivable – net presented on the face of an entity’s balance sheet is routed through the notes to the entity’s financial statements. In the notes, the allowance for doubtful debts is deducted from the balance of gross receivables. 

Accounts Receivable – Net Aging Schedule

Accounts receivable – net may be calculated using an aging schedule. This schedule helps in grouping receivables on the basis of the date since their payment is outstanding. The aging schedule may calculate the receivables that are yet to be collected by applying different default rates to each outstanding date range.

Alternatively, it can calculate the net accounts receivable by applying the expected collection rate for each date range. The purpose of this aging schedule in the context of net receivables is to apply different collection rates to different outstanding receivables based on age. As a receivable becomes older, it usually becomes harder to collect.

 

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