Accounts Receivable

Selling on credit separates earning revenue from receiving cash. Until collection, the customer balance remains an asset whose collectibility must be assessed.

Credit sales and collection

When a qualifying sale is made on credit, Accounts Receivable increases for the amount the customer owes and Sales Revenue records the amount earned. Collection later increases Cash and reduces the receivable; it does not recognize the revenue again. For goods, the selling-price entry is separate from the inventory-cost accounting. The inventory recording system does not change the customer entry; it determines whether cost entries are posted with each sale or at period end.

Gross and net presentation

The gross receivable is the amount customers are required to pay under recorded terms. The allowance for credit losses (often called the allowance for doubtful accounts) is a contra-asset that estimates the part not expected to be collected; the related charge is credit loss expense, traditionally called bad debt expense. The balance sheet presents the two together as a net receivable when that presentation is appropriate:

Net receivables = Gross receivables − Allowance

Estimating amounts that may not be collected

The allowance records a supported collection shortfall without removing the individual customer balances. An increase normally reduces profit and net receivables; a later decrease can reduce the expense when the governing requirements permit it.

IFRS 9 applies its expected-credit-loss requirements, including the simplified approach for qualifying trade receivables.

Under ASPE Section 3856, in-scope receivables carried at cost or amortized cost are assessed at each reporting date for adverse changes in expected timing or cash flows; the Section’s prescribed measurement is applied when impaired, and a qualifying later event can support a reversal, but the restored amount cannot exceed the carrying amount that would have existed without the impairment. Arm’s-length and related-party receivables can also begin with different initial measurements.

An aging schedule groups balances by how long they have been outstanding. The calculation determines the required ending allowance by applying supported loss rates to the relevant receivable groups. The period-end adjustment is the amount needed to move the allowance from its existing balance to that required ending balance; it is not automatically equal to the newly calculated total. If the existing allowance has a debit balance after write-offs, the adjustment must first eliminate that debit and then establish the required credit balance.

Write-offs and recoveries

When a specific customer balance is determined to be uncollectible, a write-off uses the allowance already established. It does not create a second bad-debt expense at that date. Because the write-off reduces the gross receivable and its allowance by the same amount, net receivables do not change. Any difference between the remaining allowance and the supported ending estimate is addressed in the period-end allowance adjustment.

If that customer later pays, the usual two-step recovery first reinstates the receivable and the related allowance, then records Cash against the restored receivable. Separating restoration from collection preserves the customer history and avoids treating the cash receipt as new revenue.

Notes Receivable

A note receivable is a written promise to repay principal on stated terms, often with interest. Interest is recognized as it is earned; collection settles principal and any interest already accrued. The full lifecycle is explained in Notes Receivable.

Analyzing receivables

Receivables turnover and days sales outstanding measure collection speed; their formulas are in Financial Statement Analysis. Compare the results with payment terms and the aging schedule; an average collection period does not show which customers are overdue.

The broader relationship between collection evidence and carrying amount is explained in Impairment and Recoverability.