Why is accounts receivable presented net?
On a company’s financial statements, the term “net” typically follows the accounts receivable balance. So why is this? According to US GAAP, the company’s accounts receivable balance must be stated at “net realizable value”. In basic terms, this just means that the accounts receivable balance presented in the company’s financial statements must be equal to the amount of cash they expect to collect from customers.
The formula to get to “accounts receivable, net” is just gross accounts receivable less the company’s allowance for doubtful accounts balance. So in the example below, the company would have gross accounts receivable of $100, but there are several customers who collectively owe $20, and the company does not think they will receive that cash. So that $20 must be captured in their allowance for doubtful accounts balance. So on a “net” basis, the company actually expects to receive $80 and not $100.
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