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 collections process, and is utilized in cash forecasts to project anticipated cash inflows. Net receivables arise due to the granting of credit. This carries 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.
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 uncollectible 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 uncollectible 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 collectibility rates to different receivables based on age. As a receivable gets older, it generally becomes harder to collect.