How to Calculate Accounts Receivable on Balance Sheet

Next to cash, accounts receivable is the most important number on the balance sheet.  It is the quickest asset to convert to cash; therefore, deserves focused attention.

Calculating accounts receivable on the balance sheet is not a formula, rather it is the sum of all unpaid credit invoices that have been issued to customers.  Another way to state this is, accounts receivable represents the unpaid total sales of product or services extended to customers on credit.  It is the life blood of the company because it dramatically affects cash flow.

To calculate the accounts receivables balance sheet amount requires a company to track all customer invoices in the accounts receivable ledger.  The accounts receivable ledger is just a fancy name for a spreadsheet, or a list, or a report, if using actual accounting software.  

The accounts receivable ledger includes an itemized list of each customer invoice.  Included for each invoice is the customer name, invoice date, invoice due date, invoice amount and the net amount due for each invoice.  Any payments received against an invoice will be deducted from the invoice amount to arrive at the net amount due.  By adding up the net amount due for all invoices determines the accounts receivable balance on the balance sheet. 

The accounts receivable ledger total and the balance sheet total must match.

There is more to accounts receivable than just a balance so continue reading to understand the expanded discussion of accounts receivable.

Gross vs net accounts receivables:  what is the difference?

As mentioned above, accounts receivable is the amount owed from customer credit sales.  This is often referred to as gross accounts receivables.

Another term you will hear associated with gross accounts receivables is “net account receivables”.  So, what is the difference between “gross” and “net” accounts receivables?

• Gross accounts receivables - are the total credit sales that are yet to be paid.
  
• Net accounts receivables - are the total credit sales that are yet to be paid minus any amount that will likely not be paid.

Net accounts receivables likely needs more explanation.  Anytime you sell on credit, there is a risk a customer will not pay for the goods or services you delivered.  Reasons may include bankruptcy, poor cash flow, or dishonesty.

This uncollectible amount is often termed “Allowance for Doubtful Accounts”.  It is the accounting method used to track estimated amounts that are likely uncollectible.  It is called a contra account because it reduces another account, in this case accounts receivable.

Net accounts receivable = Gross Accounts Receivable – Allowance for Doubtful Accounts

The allowance for doubtful accounts can be an actual line on the balance sheet and will appear directly below the accounts receivable balance.  Allowance for doubtful accounts is a credit on the balance sheet as it reduces the accounts receivable debit balance.

If you suspect an account or an invoice will not be paid, after multiple attempts to collect, you would make a journal entry to record this amount in the allowance for doubtful accounts.  You are not actually removing the invoice from accounts receivable; you are just tracking the amount that will not be collected so you can easily identify true accounts receivable.

The journal entry to record the allowance for doubtful accounts is as follows:

• ‍Debit:  Bad Debt Expense
• Credit: Allowance for Doubtful Accounts

Notice that you are recognizing an expense at this point (bad debt expense) which is an income statement account that reduces net income.  If at any point you decide the uncollectible invoice is for sure not going to be collected you would then remove it from your accounts receivable and allowance for doubtful accounts by making the following journal entry:

• ‍Debit:  Allowance for Doubtful Accounts
• Credit: Accounts receivable

What are the three classifications of receivables?

There are three classifications of receivables:  accounts receivables, notes receivables and other receivables.  While accounts receivables are the most common type of receivables, it is important to understand the other receivables and how they are different.

The primary difference between the 3 classifications of receivables is:  timing.

Accounts receivables

Accounts receivables are short term receivables.  Typically, a business will expect to collect accounts receivables within 30-60 days.  Accounts receivables relate only to the amount owed from a customer as a result of the sale of goods or services.  These are credit sales, with a short-term due date, and related to the primary operation of the business.

Notes receivables

Notes receivables are short- or long-term receivables (see below for definition).  Typically, longer than 60 days.  Notes receivables are more formal in nature and typically include a legal promise to pay.  In legal terms it is a promissory note where a debtor provides a written promise to pay a creditor based on a certain amount, over a certain period of time, with a certain interest component.

A good example of a note receivable would be a customer that fails to pay their bill in a normal 30-60-day period.  The customer agrees to pay the full amount, but needs a much longer period of time.  If all parties agree, the accounts receivable would be converted to a note receivable and reclassified on the balance sheet by making the following entry:

• ‍Debit:  Notes Receivable
• Credit: Accounts Receivable

Other receivables

Other receivables are any receivables other than accounts receivables or notes receivables.  Typically, other receivables can have short term or long-term amounts.  Examples of other receivables might be taxes receivable, interest receivable, officer receivables, employee loan receivable and so on.

What is the difference between current and noncurrent assets?

The difference between current and noncurrent assets is the length of time.  A current asset is considered collectible within one year.  A non-current asset is considered collectible in a longer than one-year time period.

As we discussed the three classifications of receivables above some mention was made of timing.  

Accounts receivable will ALWAYS be classified as current as they should be collected in 30-60 days.

Notes receivables may be classified as current, non-current or a combination of both.  If a note receivable is to be received over a period of time that extends beyond a year then the amount to be collected within the year is classified current and the amount collected after one year is classified non-current.

Other receivables may be classified as current, non-current or a combination of both.  Other receivables follow the same guidelines as notes receivables.

On a typical balance sheet, you will not find the term non-current assets.  Rather you will see a current asset section with a total, and then everything listed after the current asset section is assumed long term.

Here is a snapshot of a balance sheet for you to visualize: