Accounting

What is Gross Accounts Receivable?

Gross accounts receivable is the amount of sales that a business has made on credit, and for which no payment has yet been received. The gross receivable figure is useful for estimating the amount of cash that a business is likely to generate in the near term to pay its obligations, and so is considered a prime determinant of liquidity. The figure normally includes just trade receivables; non-trade receivables are categorized separately.

The gross receivable figure is usually classified as a current asset on the balance sheet. However, if a receivable is expected to be collected in longer than 12 months, then it is instead classified as a long-term asset on the balance sheet.

Instructions to calculate Gross Accounts Receivable:

1. Find the company’s net receivables on the balance sheet. Net accounts receivable will be one of the first accounts listed under current assets. For example, a company has \$1,000 of net accounts receivables.
2. Find the company’s allowance for doubtful accounts on the balance sheet. This is a company estimate of the amount of receivables the company cannot collect in the future. This account is normally near net receivables. In the example, a company has an allowance for doubtful accounts as \$50.
3. Add net receivables to the allowance for doubtful accounts to calculate gross receivables. In the example, \$1,000 plus \$50 equals gross receivables of \$1,050.

There is usually a contra account, called the allowance for doubtful accounts, that offsets the balance in the gross accounts receivable line item. This allowance contains management’s best estimate of the total amount of receivables that will not be paid. When the gross receivables figure is combined with this allowance account, the combined total is called net accounts receivable, which appears in the balance sheet.

In contrast to cash basis accounting, accrual basis accounting permits businesses to record sales made on credit as revenue as long as they meet certain conditions. First, the transaction that produced the revenue must be complete. Second, the revenue’s numerical value must be calculable. Third, no reason may exist to doubt that the business can collect the sums owed. The business records such revenues still owed to the business on the balance sheet as accounts receivable.

Gross accounts receivable represents sums owed to the business that the business records as revenue. Gross accounts receivable is accounts receivable before the business deducts uncollectable accounts to calculate the true value of accounts receivable.

When there is a large difference between the gross and net receivable balances, this indicates that a business expects to suffer significant bad debt losses. If so, a reasonable question is whether the business is granting credit to its customers without a sufficiently rigorous review process.

The gross accounts receivable concept only arises under the accrual basis of accounting. Under the alternative cash basis of accounting, receivables are not recorded.