How To Calculate Net Realizable Value Of Accounts Receivable - Formula - Example

How Is The Book Value Of Accounts Receivable Calculated?

The Net Realizable Value or Cash Realizable Value of Accounts Receivable can be calculated by deducted the ending balance of Allowance For Doubtful Accounts, that is a Contra Asset Account, from the closing Balance of Accounts Receivable to be shown on the Balance Sheet. It is the remaining amount that will be received in the form of Cash by company from customers in future after making estimation on the basis of Percentage of Sales (Income Statement-Approach) or the Percentage of Accounts Receivables (Balance Sheet-Approach).

Formula For Net Realizable Value (NRV) Of Accounts Receivable (A/R)

NRV = Closing Accounts Receivable - Closing Balance of Allowance For Doubtful Accounts

OR

NRV = Gross Amount Of Accounts Receivable - Allowance For Doubtful Accounts

For Example, if a company has Closing Accounts Receivable = Rs. 50000 and 5% Allowance For Doubtful Accounts on Net Sales = Rs. 700000, then what is the Cash Realizable Value?

We know that:

NRV = Ending Accounts Receivable - Ending Allowance For Doubtful Accounts

                          = 50000 - 14000 = Rs. 36000

Here Allowance for Doubtful Accounts = 2% X 700000 = Rs. 36000

This Net Realizable Value or Cash Realizable Value or Book Value of accounts receivable is shown on the Balance Sheet to give true and fair view of financial information to the Users of Financial Statements.