Account receivable is the amount which we have to take from our customers when we sell goods to them on credit. When we have sold goods on credit, it is not sure, we will get whole the amount of account receivable because if our customer is not honest or he will become insolvent or he will go underground by consuming our sold goods on credit, it is the chance, our whole or some money of account receivable will become bad debt. So, to calculate the net account receivable on the basis of past behavior of our customers will be helpful for us to use our working capital effectively.
Here, we are explaining its simple steps:
For calculating the net account receivables, we have to calculate the estimated amount ofbad debt. This calculation is done on the basis of past experience.
For example, after evaluating past Bad Debts account, we have reached on the calculation that there is the chance of 10% bad debts. So, if there are $ 1,00,000 account receivables, then we have chance to collect money of $ 90,000.
2nd Step : To Calculate the Current Value of Bad Debts
Current value of bad debts can be calculated on the basis of current behavior of our customer. If we have opened our all customers' account, we have to classify it on basis of payment period. There are some customers who have paid within 30 days, there are some customers who have paid within 60 days and still there are some customers who did not paid after expiring of 120 days. If we have a clear policy when we make any uncollected debt as bad debt, we can calculate the value of bad debt. For example, as per our policy, we have can make any debt as bad debt if we have not received within 60 days.
Now, we will reach the net account receivables if we we deduct these current bad debts. In above example, we have $ 90,000 and as per our calculation, our current value of bad debts are $ 20,000, then our balance net account receivable will be $ 70,000.
In second way, we have to calculate weighted % of actual invoices paid within our customers' aging period.Then this weighted % will multiply with total no. of account receivables for calculating net account receivables.
Invoices presented : Invoices paid by customer
$ 1,00,000 : $ 90,000
90% paid
Invoices presented : Total no. of invoices
$ 1,00,000 : $ 2,00,000
50%
weighted % of net paid of invoices by customers.
50% of 0.90
= 0.45 or 45%
So, if total account receivables are $ 2,00,000, then net account receivable which will receive, will be $ 90,000
Here, we are explaining its simple steps:
1st Way :
1st Step : To Calculate the Estimated Amount of Bad Debt
For calculating the net account receivables, we have to calculate the estimated amount ofbad debt. This calculation is done on the basis of past experience.
For example, after evaluating past Bad Debts account, we have reached on the calculation that there is the chance of 10% bad debts. So, if there are $ 1,00,000 account receivables, then we have chance to collect money of $ 90,000.
2nd Step : To Calculate the Current Value of Bad Debts
Current value of bad debts can be calculated on the basis of current behavior of our customer. If we have opened our all customers' account, we have to classify it on basis of payment period. There are some customers who have paid within 30 days, there are some customers who have paid within 60 days and still there are some customers who did not paid after expiring of 120 days. If we have a clear policy when we make any uncollected debt as bad debt, we can calculate the value of bad debt. For example, as per our policy, we have can make any debt as bad debt if we have not received within 60 days.
Now, we will reach the net account receivables if we we deduct these current bad debts. In above example, we have $ 90,000 and as per our calculation, our current value of bad debts are $ 20,000, then our balance net account receivable will be $ 70,000.
2nd Way :
In second way, we have to calculate weighted % of actual invoices paid within our customers' aging period.Then this weighted % will multiply with total no. of account receivables for calculating net account receivables.
Invoices presented : Invoices paid by customer
$ 1,00,000 : $ 90,000
90% paid
Invoices presented : Total no. of invoices
$ 1,00,000 : $ 2,00,000
50%
weighted % of net paid of invoices by customers.
50% of 0.90
= 0.45 or 45%
So, if total account receivables are $ 2,00,000, then net account receivable which will receive, will be $ 90,000
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