Accounts Receivable: Recognition, Measurement, and Financial Reporting

Accounts Receivable (AR) represent amounts owed to a company by its customers for goods sold or services provided on credit. As a significant component of working capital, receivables are critical to understanding a company’s liquidity, credit risk exposure, and operating efficiency.

This article covers the concept, recognition, measurement, impairment, and disclosure of Accounts Receivable, with references to U.S. GAAP (ASC 310), IFRS 9, and practical examples.

1. What Are Accounts Receivable?

Accounts Receivable arise when:

✦ A company delivers goods or services to a customer, and

✦ Payment is promised but deferred for a period, usually ranging from 30 to 90 days.

Receivables are current assets (if collectible within 12 months) and are reported on the balance sheet at their net realizable value — the amount the company expects to collect.

2. Initial Recognition

Receivables are recognized when:

✦ Control of the goods or services transfers to the customer, and

✦ A right to payment becomes unconditional, dependent only on the passage of time.

This aligns with revenue recognition principles under ASC 606 and IFRS 15.

Journal Entry at Sale:

Debit: Accounts Receivable – Amount Billed

Credit: Revenue – Amount Billed

3. Initial Measurement

Accounts receivable are initially measured at:

✦ Transaction price agreed with the customer.

This amount reflects:

✦ Contracted sales price, adjusted for any trade discounts, volume rebates, or expected price concessions.

No discounting is typically required if the payment terms are short-term (less than one year).

4. Subsequent Measurement: Allowance for Credit Losses

Over time, companies must assess whether they will collect the full amount of accounts receivable.

Both U.S. GAAP and IFRS require recognizing expected credit losses — adjusting the carrying amount of receivables to net realizable value.

U.S. GAAP (ASC 310 and ASC 326 - CECL Model)

✦ Companies use the Current Expected Credit Loss (CECL) model to estimate lifetime expected losses.

✦ Losses are recognized immediately — not just when a default event is probable.

IFRS (IFRS 9)

✦ Companies apply a simplified expected credit loss model for trade receivables.

✦ Lifetime expected losses are recognized from the initial recognition date, without staging.

Journal Entry for Allowance for Doubtful Accounts:

Debit: Bad Debt Expense – Estimated Loss

Credit: Allowance for Doubtful Accounts – Estimated Loss

5. Example – Recognizing and Adjusting Allowance

Suppose a company has $500,000 in gross receivables and estimates 2% will be uncollectible.

✦ Estimated loss = $500,000 × 2% = $10,000

Journal Entry:

Debit: Bad Debt Expense – $10,000

Credit: Allowance for Doubtful Accounts – $10,000

Net Accounts Receivable reported:

✦ $500,000 – $10,000 = $490,000

If later a specific customer balance of $3,000 is deemed uncollectible:

Write-off Entry

Debit: Allowance for Doubtful Accounts – $3,000

Credit: Accounts Receivable – $3,000

6. Aging Analysis and Historical Data Use

Companies typically base their loss estimates on:

✦ Historical loss rates

✦ Aging analysis (0–30 days past due, 31–60 days, etc.)

✦ Current economic conditions

✦ Forward-looking information (under CECL and IFRS 9)

This analysis helps ensure that expected credit losses are reasonable and supportable.

7. Discounting of Receivables

If the time to payment is more than one year, receivables should be discounted to present value using an appropriate discount rate.

However, most trade receivables have short settlement periods and thus are not discounted.

8. Derecognition of Accounts Receivable

Receivables are removed from the books when:

✦ Cash is collected, or

✦ They are written off due to default, or

✦ They are transferred/sold under factoring arrangements (subject to derecognition rules).

U.S. GAAP (ASC 860) and IFRS 9 provide detailed guidance for derecognition in factoring or securitization transactions.

9. Financial Statement Presentation

On the balance sheet:

✦ Gross Accounts Receivable

✦ Less: Allowance for Doubtful Accounts

✦ = Net Accounts Receivable

Receivables are generally classified as current assets, unless collection is expected beyond 12 months.

10. Disclosure Requirements

Financial statements must disclose:

✦ The accounting policies for recognizing receivables and related losses

✦ The amount of receivables, net of allowance

✦ Aging schedules of trade receivables

✦ Credit risk management practices

✦ Rollforward of the allowance for doubtful accounts

Disclosures provide transparency about credit risks and collection effectiveness.

11. Key Differences Between U.S. GAAP and IFRS

Aspect	U.S. GAAP (ASC 310 / ASC 326)	IFRS (IFRS 9)
Loss Model	CECL – Lifetime expected losses at inception	Simplified lifetime expected loss model
Discounting	Rare for short-term receivables	Same
Derecognition Rules	Strict under ASC 860	Principles-based under IFRS 9
Disclosures	Detailed CECL and credit quality disclosures	Similar detailed disclosures required