Net realizable value of accounts receivable is calculated as which of the following?

Net realizable value of accounts receivable is calculated as which of the following?

• A. A/R minus Allowance for Doubtful Accounts
• B. A/R minus Bad Debt Expense
• C. A/R minus Accumulated Depreciation
• D. A/R minus Taxes Payable

Answer: (A)

Net realizable value is the amount of receivables a company actually expects to collect in cash. To get that, you subtract the Allowance for Doubtful Accounts from Accounts Receivable because the allowance represents the estimated uncollectible portion of the receivables. This contra-asset account reduces the gross AR to reflect what you expect to realize. Bad Debt Expense affects net income and the formation of the allowance, but it isn’t subtracted directly from Accounts Receivable to compute NRV. Accumulated Depreciation reduces fixed assets, not receivables. Taxes Payable is a liability and has no direct impact on the realizable value of receivables. Example: if Accounts Receivable is 100 and the Allowance for Doubtful Accounts is 5, NRV is 95.

Net realizable value is the amount of receivables a company actually expects to collect in cash. To get that, you subtract the Allowance for Doubtful Accounts from Accounts Receivable because the allowance represents the estimated uncollectible portion of the receivables. This contra-asset account reduces the gross AR to reflect what you expect to realize.

Bad Debt Expense affects net income and the formation of the allowance, but it isn’t subtracted directly from Accounts Receivable to compute NRV. Accumulated Depreciation reduces fixed assets, not receivables. Taxes Payable is a liability and has no direct impact on the realizable value of receivables.

Example: if Accounts Receivable is 100 and the Allowance for Doubtful Accounts is 5, NRV is 95.