Final answer:
The net realizable value of A/R is calculated by subtracting the allowance for doubtful accounts from the total gross accounts receivable. It represents the estimated amount of receivables that the company expects to collect in cash.
Step-by-step explanation:
To calculate the net realizable value of Accounts Receivable (A/R), you need to estimate the amount of A/R that is actually expected to be collected. The net realizable value is the total gross accounts receivable minus any allowance for doubtful accounts. Here are the steps to get net realizable A/R:
- Calculate the total gross accounts receivable. This is the sum of all outstanding invoices owed by customers.
- Estimate the allowance for doubtful accounts. This is an estimate of the amount of receivables that will not be collected due to customers' inability to pay, which could include specific provisions for known bad debts or a percentage based on historical data.
- Subtract the allowance for doubtful accounts from the total gross accounts receivable to get the net realizable value of A/R.
For example, if a company has $100,000 in gross accounts receivable and anticipates that $5,000 will be uncollectible, the net realizable value of A/R would be $95,000.