How Accounts Receivable Is Measured and Reported on the Balance Sheet

Accounts receivable represent the amounts owed to a company by customers who have purchased goods or services on credit. They are one of the most significant current assets on the balance sheet, as they directly reflect the company’s ability to convert sales into cash. Proper measurement and reporting of accounts receivable ensure that financial statements present a reliable picture of liquidity and credit risk. Under both IFRS and US GAAP, receivables are subject to recognition, measurement, and impairment rules that safeguard against overstating asset values.

Accounts receivable arise from credit sales and service contracts.

When a company delivers goods or services but allows the customer to pay at a later date, it records an account receivable. This arrangement supports sales growth but also introduces credit risk, as collection depends on the financial health of customers.

For example, if a business sells merchandise worth 25,000 on credit, the entry is:

• Debit: Accounts Receivable 25,000

• Credit: Revenue 25,000

This receivable remains on the balance sheet until the customer pays, at which point it is converted to cash.

Measurement rules emphasize expected collectability.

Accounts receivable are initially measured at transaction price and subsequently adjusted for expected credit losses. Under IFRS 9, entities apply the expected credit loss (ECL) model, recognizing allowances based on forward-looking estimates of default risk. US GAAP under ASC 326 also applies a current expected credit loss (CECL) model, requiring companies to estimate lifetime losses on receivables.

For example, if a company expects that 2 percent of receivables will not be collected, it records an allowance for doubtful accounts. This ensures that the reported balance reflects the net realizable value, or the cash expected to be collected.

Presentation on the balance sheet shows gross and net values.

Accounts receivable are reported under current assets on the balance sheet, usually net of allowances for doubtful accounts. Some companies disclose both the gross receivable balance and the allowance, providing clarity on the extent of credit risk.

For instance:

• Accounts Receivable: 100,000

• Less: Allowance for Doubtful Accounts: (2,000)

• Net Accounts Receivable: 98,000

This presentation ensures that stakeholders assess liquidity based on realistic expectations of collection.

Journal entries show how allowances are recorded.

To create or adjust an allowance for doubtful accounts, the entry is:

• Debit: Bad Debt Expense 2,000

• Credit: Allowance for Doubtful Accounts 2,000

When a specific receivable is deemed uncollectible, the write-off is recorded as:

• Debit: Allowance for Doubtful Accounts 1,000

• Credit: Accounts Receivable 1,000

This method ensures that bad debt expense is matched to the period in which the sale occurred, preserving accuracy in profit reporting.

Standards harmonize recognition and disclosure requirements.

Under IFRS 7 and IFRS 9, companies must disclose the policies and assumptions used in measuring expected credit losses, along with information about credit risk exposure and collateral. US GAAP requires similar disclosures under ASC 310 and ASC 326, including details of credit quality indicators and aging of receivables.

These disclosures give investors and creditors insight into how companies manage credit risk and the likelihood of realizing receivable balances.

Accounts receivable analysis highlights liquidity and risk.

Analysts examine accounts receivable turnover and the average collection period to evaluate efficiency in managing credit. High receivable balances relative to sales may indicate slow collections, raising concerns about liquidity.

For example, if annual credit sales are 1,200,000 and average receivables are 200,000, the turnover ratio is 6, meaning the company collects its receivables every two months on average. A declining turnover ratio could suggest deteriorating credit practices or customer financial distress.

Disclosure and transparency strengthen decision-making.

Clear presentation of accounts receivable, allowances, and credit risk policies provides stakeholders with a comprehensive view of a company’s financial position. Accurate reporting ensures that investors, creditors, and management can evaluate the quality of receivables, the reliability of reported assets, and the company’s capacity to generate cash from its sales.

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