Net Receivables

What is 'Net Receivables'

Net receivables is the total money owed to a company by its customers minus the money owed that will likely never be paid. Net receivables is often expressed as a percentage, and a higher percentage indicates a business has a greater ability to collect from its customers. For example, If a company estimates that 2% of its sales are never going to be paid, net receivables equal 98% (100% - 2%) of the accounts receivable.

BREAKING DOWN 'Net Receivables'

Net receivables is used to measure the effectiveness of a company's collection process and is utilized in cash forecasts to project anticipated cash inflows. Net receivables arise due to the granting of credit. This carried inherent credit and default risk as the business does not receive payment upfront. Cash collections can be improved by tightening control over credit issued to customers, maintaining efficient collection procedures and performing collection procedures in a timely manner.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is subtracted from the gross amount of outstanding accounts receivables. The two main methods of estimating the allowance for doubtful accounts is the net receivable method or net sales method. In addition, a specific identification method may be used in which each debt is individually evaluated regarding the likelihood of being collected.

Balance Sheet

Net receivables are shown as an aggregated total on the balance sheet. Typically, net receivables relate to account receivables from customers in the course of business. In this case, net receivables is classified as a current asset. The gross receivables are listed first and are followed by the allowance for doubtful accounts. The allowance for doubtful accounts is a contra asset account as it reduces the balance of an asset.

Subject to Estimation and External Factors

Because all future receipts of cash as well as defaults are not known, net receivables represents an estimated amount. This is largely contingent on the estimated amount of uncollectable accounts. Therefore, management has potential to manipulate the value of net receivables by adjusting the allowance for doubtful accounts. In addition, a company's net receivables is highly subject to general economic conditions. Regardless of the entity's procedures, the figure tends to worsen as financial conditions worsen in the general economy.

Net Receivables Aging Schedule

Net receivables may be calculated using an aging schedule. This table groups receivables by outstanding payment date ranges. The aging schedule may calculate the uncollectable receivables by applying various default rates to each outstanding date range. Alternatively, it can simply calculate the net receivables by applying the estimated collection rate for each range. The concept behind an aging schedule is to apply different collectability rates to different receivables based on age. As a receivable gets older, it generally becomes harder to collect.

RELATED TERMS
  1. Accounts Receivable Aging

    A periodic report that categorizes a company's accounts receivable ...
  2. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
  3. Receivables

    An asset designation applicable to all debts, unsettled transactions ...
  4. Average Collection Period

    The approximate amount of time that it takes for a business to ...
  5. Accounts Receivable - AR

    Money owed by customers (individuals or corporations) to another ...
  6. Bad Debt Expense

    An entry found on a business's income statement that represents ...
Related Articles
  1. Investing

    What's an Allowance for Doubtful Accounts?

    The allowance for doubtful accounts represents the percentage of the accounts receivable the company expects to write-off as uncollectible.
  2. Investing

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  3. Investing

    What are Receivables?

    Receivables are debts, transactions or other obligations owed to a company by its debtors or customers.
  4. Investing

    What is a Contra Account?

    A contra account is an offset that reduces the value of a related account.
  5. Investing

    Accounts Receivable

    Accounts Receivable (A/R) is an accounting term used to refer to the money that is owed to a company by its customers.
  6. Investing

    Calculating Net Cash

    A company’s net cash is its total cash remaining after it subtracts all liabilities.
  7. Investing

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  8. Investing

    Understanding Accounts Receivable Aging

    Company managers use accounts receivable aging reports to monitor overdue accounts.
  9. Investing

    Spotting Creative Accounting On The Balance Sheet

    Companies have ways of manipulating their balance sheets that investors should be aware of.
  10. Investing

    What's an Average Collection Period?

    Average collection period is an accounting term referring to the average number of days between a sale made on credit, and receipt of the payment. Businesses monitor this number to make sure ...
RELATED FAQS
  1. How long are accounts receivable allowed to be outstanding?

    Learn about accounts receivable, including how long they typically remain outstanding, and how their payment or lack of payment ... Read Answer >>
  2. How should investors interpret accounts receivable information on a company's balance ...

    Analyze accounts receivable information on a company's balance sheet carefully. Receivables offer confidence of future cash ... Read Answer >>
  3. What is the formula for calculating the receivables turnover ratio?

    Find out how to calculate the accounts receivable turnover ratio for a business, which should highlight how efficiently the ... Read Answer >>
  4. How is cash flow affected by Average Collection Period?

    See how reducing a company's average collection period can help cash flow, and learn why collections practices are so important ... Read Answer >>
  5. Why is Average Collection Period important to a company?

    Discover why the average collection period can be a particularly important accounting ratio for a company that relies heavily ... Read Answer >>
  6. In which industries is Average Collection Period most important?

    Find out which industries are most concerned with average collection period, and how different types of companies interact ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center