What Is Net Accounts Receivable & How to Calculate It?

What Is Net Accounts Receivables?

Net accounts receivable is the amount of money a company expects to collect from its customers after accounting for any potential deductions, such as allowances for doubtful accounts, returns, or discounts. Essentially, it represents the realistic collectible value of the total accounts receivable.

How to Calculate Net Accounts Receivable?

To calculate net accounts receivable, you need: total accounts receivable, allowance for doubtful accounts, and sales returns and allowances. Then, subtract the allowance for doubtful accounts, sales returns and allowances from the Total Account Receivables. This net amount gives a realistic expectation of cash inflows from AR.

Here’s how to calculate each:

1. Total accounts receivable

   The gross amount of all outstanding invoices and amounts owed by customers.
   Steps:

   • Gather all outstanding invoices issued to customers for goods or services provided on credit.
   • Sum the amounts of all these invoices to get the total accounts receivable.
   • Ensure all sales on credit are recorded in your accounting system for accurate tracking.

2. Allowance for doubtful accounts

   An estimate of the receivables that are unlikely to be collected.
   Steps:

   • Review historical data to determine the percentage of receivables that typically become uncollectible.
     
   • Evaluate the financial health and payment history of current customers to refine the estimate.
     
   • Use methods like the percentage of sales method or the aging of accounts receivable method to calculate the allowance.|
     
   • Regularly review and adjust the allowance based on changes in economic conditions and customer circumstances.
     

3. Sales returns and allowances

   Deductions for returned goods or allowances given to customers for various reasons.

   Steps:

   • Track all returned goods and record the corresponding amounts.
     
   • Document any allowances given for reasons such as damaged goods or customer dissatisfaction.
     
   • Deduct these returns and allowances from the total accounts receivable to account for the reduced receivable amounts.
     
   • Maintain proper documentation to support these deductions.

Net accounts receivable formula

Example of Net Accounts Receivable

Now let’s understand how to find net accounts receivable using an example

If a company has $100,000 in total accounts receivable, estimates $5,000 for doubtful accounts, and has $3,000 in sales returns, the net accounts receivable would be:

Net Accounts Receivable = $100,000 − $5,000 − $3,000 = $92,000

This $92,000 is what the company realistically expects to collect from its customers.

How to Calculate Average Net Accounts Receivable

For calculating the average net accounts receivable over a period, you need to follow these steps:

1. 
   

   Find the beginning and ending net accounts receivable

   
   

   Identify the net accounts receivable at the beginning and end of the period.

   
   
2. 
   

   Calculate the average

   
   

   Add the beginning and ending net accounts receivable and divide by two.

   
   

Average net accounts receivable formula

Average Net Accounts Receivable =(Beginning Net Accounts Receivable + Ending Net Accounts Receivable)/ 2

How to Improve the Net A/R Percentage for Your Company?

By implementing strategic practices, businesses can streamline collections, reduce outstanding balances, and optimize working capital.

Here’s how your company can effectively boost its net A/R percentage:

1. Improve cash flow projections: By incorporating AI-guided exception management, and maintaining up-to-date A/R data and forecasting tools, you can more accurately predict cash inflows. It helps in making informed decisions about expansion, and other critical business operations, ensuring financial stability.
2. Vet new customers carefully: Before extending credit, conduct thorough credit checks and assess the financial stability of potential customers. Establish clear credit terms and ensure they are communicated effectively.
3. Regularly review existing accounts: Monitor payment patterns of existing customers closely. Identify any signs of delinquency early to address issues promptly and prevent overdue accounts from accumulating.
4. Reduce reliance on credit: Diversify revenue streams and minimize dependency on credit by incentivizing alternative payment methods or offering discounts for upfront payments.
5. Strengthen supplier relationships: Strengthen relationships with suppliers by consistently meeting payment deadlines. This can lead to improved credit terms and discounts, further optimizing cash flow.
6. Provide incentives for early payment: Implementing early payment discounts encourages customers to settle invoices promptly, reducing A/R turnover and enhancing liquidity.
7. Promptly follow up with invoices: Establish a streamlined invoicing process and follow up promptly on overdue payments. Clear communication and reminders can expedite collections and reduce outstanding balances.
8. Utilize technology: Invest in accounting software or A/R management systems to automate invoicing, payment reminders, and reporting. Use AI to prioritize collection worklists and manage exceptions effectively. These tools can streamline operations and improve efficiency in managing receivables.
9. Regularly analyze A/R metrics: Track key metrics such as Days Sales Outstanding (DSO), A/R turnover ratio, and aging reports. Regular analysis provides insights into collection effectiveness and highlights areas for improvement.

How HighRadius Can Improve Your AR Performance?

HighRadius offers a comprehensive Order to Cash suite that can significantly enhance the efficiency and effectiveness of AR teams. By integrating AI-driven features and automated processes, the software streamlines AR operations, reducing manual effort and boosting productivity.

Here are some key features and benefits:

1. 
   

   Integrated workflows: HighRadius integrates AI-driven features like prioritized worklists and intelligent email management, ensuring seamless exception management and collaboration across AR teams.

   
   
2. 
   

   Automated task management: Automate routine tasks such as remittance matching and deductions coding using AI-guided processes, boosting operational efficiency.

   
   
3. 
   

   AI-powered insights: Utilize AI for advanced dunning strategies and exception management, improving productivity by 30% in collections and cash application.

   
   
4. 
   

   Optimized cash flow: Implement features like electronic invoicing with 100% automation and buyer portal invoicing, increasing electronic payments adoption by 30%.

   
   
5. 
   

   Cost Reduction and efficiency: Achieve a 20% reduction in Days Sales Outstanding (DSO) and over $100,000 in hard cost savings through streamlined workflows and reduced manual effort.

   
   
6. 
   

   Business impact: Drive tangible outcomes including reduced past dues by 20%, enhanced collections productivity, and improved overall financial health.

   
   

FAQs

1. What is the difference between accounts receivable and net accounts receivable?
   

   Accounts receivable (A/R) represents the total amount owed to a company by its customers for goods or services delivered on credit. Net accounts receivable is the amount expected to be collected, calculated by subtracting the allowance of doubtful accounts from the total Account Receivable.

   
   
2. Is net accounts receivable a current asset?
   

   Yes, net accounts receivable is considered a current asset on the balance sheet. This is because it represents the cash that is expected to be received from customers within the normal operating cycle of the business, typically within one year. It is a significant component of current assets.

   
   
3. Is net accounts receivable a debit or credit?
   

   Net accounts receivable is recorded as a debit on the balance sheet. In accounting, debits increase asset accounts, while credits decrease them. Since net accounts receivable is an asset, it is listed as a debit to indicate the expected amount to be collected from customers.