Net receivables

Net receivables is the amount of money owed by customers that a business expects them to actually pay. This information is used to measure the credit and collection effectiveness of an organization, and can also be included in the cash forecast to measure projected cash inflows. A large difference between gross receivables and net receivables indicates a significant problem with either the credit granting or collection activities of a business.

The net receivables amount is calculated by subtracting the allowance for doubtful accounts from the gross amount of accounts receivable outstanding. The calculation is:

Gross trade receivables - Allowance for doubtful accounts = Net receivables

Net receivables can also be expressed as a percentage, where the net receivable figure is divided by gross receivables to arrive at the percentage. For example, an organization has $1,000,000 of gross receivables outstanding and an allowance for doubtful accounts of $30,000. Its net receivables figure and percentage are calculated as follows:

$1,000,000 Gross trade receivables - $30,000 Allowance = $970,000 Net receivables

$970,000 Net receivables / $1,000,000 Gross trade receivables = 97% Net receivables

The net receivables outcome can be altered if the accounting staff does not set the allowance for doubtful accounts to be a reasonable representation of actual bad debt losses.

The net receivables figure can be improved by maintaining tight control over the credit granted to new customers, as well as by operating an active collections group. However, the figure may worsen despite a company's best efforts if there is a decline in general economic conditions that adversely impacts the ability of its customers to pay.

Related Courses

Bookkeeping Guidebook 
Credit and Collection Guidebook 
The Interpretation of Financial Statements