Question

A company reports the following balances at the end of the current year : Accounts Receivable $525,000 Bad Debts Expense 4,000 Allowance for Bad Debts 5,000 What is the net realizable value of accounts receivable ?

Answer 1

The net realizable value of accounts receivable is $520,000.

Step-by-step explanation:

The net realizable value (NRV) of accounts receivable is calculated by subtracting the estimated amount of uncollectible accounts, represented by the Allowance for Bad Debts, from the total Accounts Receivable. In this case, the calculation is as follows:

`\[ NRV = Accounts Receivable - Allowance for Bad Debts \]`

`\[ NRV = $525,000 - $5,000 \]`

`\[ NRV = $520,000 \]`

The Allowance for Bad Debts is the contra-asset account that reflects the estimated amount of accounts receivable that may not be collected. Bad Debts Expense is the amount recognized as an expense in anticipation of this potential loss. Therefore, the Net Realizable Value is the company's expected amount to collect from its accounts receivable after accounting for the estimated bad debts.

Understanding the NRV is crucial for assessing the actual value of receivables and provides a more accurate representation of a company's financial health. It reflects the realistic amount the company can expect to receive from its customers, taking into account potential losses from uncollectible accounts. This information is valuable for making informed financial decisions and evaluating the effectiveness of credit and collection policies.