Want to learn the Net Accounts Receivable? Read on.
Net accounts receivable is a vital financial metric that accountants and bookkeepers use to gauge a company’s financial standing.
It essentially shows the money a company anticipates receiving from its customers, but after accounting for doubtful accounts and uncollectible debts.
This figure is critical for evaluating a company’s ability to handle credit sales and recover owed funds, which, in turn, has a significant impact on its cash flow and financial stability.
For us in accounting, keeping a close eye on net accounts receivable is essential to strike the right balance between revenue generation and risk management in the context of accounts receivable.
What is Net Accounts Receivable?
Net accounts receivable is a financial metric that tells you how much money your company expects to receive from customers after accounting for potential losses due to uncollectible debts.
The formula for calculating it is:
Net Accounts Receivable = Total Accounts Receivable - Allowance for Doubtful Accounts
Let’s break down what these components mean for you as an accounting professional
1. Total Accounts Receivable
This is the total amount of money your customers owe for products or services that have been delivered but not yet paid for. It encompasses both current and long-term accounts receivable.
2. Allowance for Doubtful Accounts
This is your estimate of the portion of accounts receivable that you don’t expect to collect due to factors like customer defaults or economic uncertainties. You might also know it as the “bad debt reserve” or “provision for bad debts.” You set this amount aside to cover potential losses.
Remember, the “Allowance for Doubtful Accounts” is based on estimates and historical data, so the actual amount of uncollectible debts may vary.
As an accountant, you’ll play a role in regularly reviewing and adjusting this allowance to reflect changing economic conditions and shifts in customer payment patterns.
Example of Net Accounts Receivable
Imagine you’re an accountant at a company that sells office supplies.
Your company has a substantial customer base, and it provides credit terms to its customers, allowing them to pay for their purchases within 30 days.
At the end of a particular accounting period, you’re responsible for calculating the net accounts receivable.
Step 1 Total Accounts Receivable
You review your records and find that, at the end of the accounting period, your company has a total of $100,000 in accounts receivable.
This is the amount your customers owe for office supplies they’ve received but not yet paid for within the 30-day credit term.
Step 2 Allowance for Doubtful Accounts
You also maintain an “Allowance for Doubtful Accounts,” which represents an estimate of uncollectible debts.
After analyzing past data and customer payment behavior, you determine that you should set aside $5,000 as a provision for bad debts.
Step 3: Calculate Net Accounts Receivable
Now, you can calculate the net accounts receivable using the formula:
Net Accounts Receivable = Total Accounts Receivable - Allowance for Doubtful Accounts Net Accounts Receivable = $100,000 - $5,000 Net Accounts Receivable = $95,000
So, in this example, the net accounts receivable for your company is $95,000.
This means that you expect to collect $95,000 from your customers after accounting for the estimated $5,000 in uncollectible debts.
It indicates that you have $95,000 in expected cash flow from your accounts receivable, which can be used to cover your short-term financial obligations, such as paying suppliers or meeting operating expenses.
|Metric||Formula||Example Values (in dollars)|
|Net Accounts Receivable||Net Accounts Receivable = Total Accounts Receivable – Allowance for Doubtful Accounts|
|Total Accounts Receivable||$100,000|
|Allowance for Doubtful Accounts||$5,000|
|Net Accounts Receivable (Result)||$100,000 – $5,000 = $95,000||$95,000|