Explain net realizable value of accounts receivable

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Answer 1

Answer #1

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Net realizable value of accounts receivables is the ‘amount’ that the company expects to be received or recoverable from its Accounts receivables.
Accounts receivables are the entities that owe the company some money.
However, there can be cases and instances where company may seems to be in doubt regarding the recovery of those amount. In those cases, the company accounts for Bad Debt Expenses.
One of the method to account for Bad Debt expense is the Allowance Method.
Under this, the company estimates a certain % that it expects to be unrecoverable or doubtful from accounts receivables.
This amount is recorded in a separate ‘Contra Asset’ account named “Allowance for Doubtful Account”.
On Balance Sheet, the balance in Allowance Account is deducted from Accounts Receivable’s balance, and the accounts receivables are shown at Net Realizable value.
Hence, Net Realizable value = Total balance of Accounts receivables – balance in Allowance account.
In simple terms, Net realizable value means the expected amount that can be recovered from accounts receivables.

Answer 2

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