What is net accounts receivable?

Definition

Net accounts receivable is the share of unpaid customer invoices you still expect to collect. It is accounts receivable after subtracting the reserve for amounts that will probably never come in.

On the books, this is a current asset, not revenue and not cash. Revenue was recorded when you invoiced; cash arrives only when the customer pays.

The gross invoices tell you what customers were billed. The net figure is the one that belongs among the other assets on the Balance Sheet.

Where it shows up

Balance Sheet: Located in the current assets section.

P&L: Related to revenue that has been invoiced, but not collected.

Cash flow: Decreases in this account, reported cash from operating activities increases.

See also: Accounts Receivable · Allowance For Doubtful Accounts · Current Assets

When you look at your Balance Sheet, net accounts receivable sits in current assets, near cash. It is often shown as accounts receivable minus the allowance, or as a single net line.

A high net balance usually means more uncollected invoices or slower-paying customers. A low net balance can mean customers pay quickly, you sell mostly for cash, or the allowance is large relative to gross invoices.

The profit and loss statement does not list this net figure as a line. Related revenue already hit the P&L when you invoiced, and the related expense for the reserve is bad debt, not this asset.

On the Statement of Cash Flows, collecting is the event that matters. When this account decreases because a customer paid, reported cash from operating activities increases.

Many small-business packs print gross receivables, the allowance, and the net amount stacked together. The net line is the one that counts in current assets.

How it works

Gross accounts receivable goes up when you invoice a customer. That gross total is simply what the open invoices add up to, before any reserve.

The allowance for doubtful accounts is the contra-asset that sits against those invoices. Subtract it, and you have net accounts receivable.

When a customer pays, cash goes up and gross receivables go down by the same amount. The allowance does not move on a normal collection, so the net figure falls by what was collected.

When you write off a specific invoice against the allowance, both gross receivables and the allowance fall. The net figure stays the same, because you already reduced it when you funded the reserve.

If you later decide the reserve is too small, you increase the allowance and net accounts receivable falls. No cash moves on that estimate; only the net asset and the related expense change.

Reconcile the net figure at period end to the receivable subledger and the allowance support. The invoices should add to gross, the reserve should have a reason, and net should be the difference.

Example

A dental office has $40,000 of open patient invoices and a $2,000 allowance for amounts it does not expect to collect. Net accounts receivable is $38,000.

A patient pays a $1,000 crown invoice by card. The office records:

Debit: Cash $1,000

Credit: Accounts receivable $1,000

Gross receivables fall to $39,000, and the allowance is still $2,000. Net accounts receivable is now $37,000, and cash is $1,000 higher.

The Balance Sheet still balances. The profit and loss statement does not record the crown a second time, because that sale was booked when the invoice went out.

Common mix-ups

Net accounts receivable is not the same as gross invoices. Gross is what you billed; net is what you still expect to collect after the allowance.

Net accounts receivable is not cash. You cannot spend it until the patient pays, even though it sits next to cash in current assets.

Writing off an invoice against the allowance is not a new hit to the net figure. The net asset already dropped when you recorded the reserve; the write-off only clears the specific invoice.

Related terms

• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Allowance For Doubtful Accounts: A contra-asset reserve estimating the share of receivables that will not be collected.
• Bad Debt Expense: The expense recorded when receivables are judged uncollectible.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Accounts Receivable Aging: A report bucketing open invoices by how long they have been outstanding.
• Write-Off: Removing a balance from the books when it will not be collected or paid.
• Current Assets: Assets expected to turn into cash or be used up within one year.
• Account Reconciliation: Proving that a ledger balance agrees to independent support.