Gross Accounts Receivable
Gross Accounts Receivable refers to the total amount of money owed to a business by its customers for goods or services delivered or used but not yet paid for. These are typically recorded as an asset on a company’s balance sheet.
Gross Accounts Receivable includes all monies due to a company, regardless of whether they are due now or at some point in the future. It does not take into account any potential bad debts – debts that a company is unlikely to be able to collect – which could reduce the actual amount the company will receive.
For example, if a company sells goods or services to a number of customers on credit, the total amount of money that these customers owe the company would be recorded as its Gross Accounts Receivable.
However, it’s important to note that the Gross Accounts Receivable amount is not necessarily the amount the company expects to receive. Some customers might be unable to pay their debts due to insolvency or other reasons. Therefore, companies often also calculate a Net Accounts Receivable figure, which is the Gross Accounts Receivable minus an allowance for doubtful accounts (i.e., debts that the company does not expect to be able to collect).
Example of Gross Accounts Receivable
Suppose we have a business, XYZ Corp., that sells goods to its customers on credit. At the end of the fiscal year, the company looks at its invoices and determines that its customers owe it $500,000. This total amount represents XYZ Corp.’s Gross Accounts Receivable.
However, based on its past experience and current knowledge about its customers, XYZ Corp. estimates that $20,000 of this amount is unlikely to be collected because some customers are facing financial difficulties. This amount is the company’s allowance for doubtful accounts.
To calculate Net Accounts Receivable, XYZ Corp. would subtract the allowance for doubtful accounts from its Gross Accounts Receivable:
$500,000 (Gross Accounts Receivable) – $20,000 (Allowance for Doubtful Accounts) = $480,000 (Net Accounts Receivable)
So in this example, while the Gross Accounts Receivable is $500,000, XYZ Corp. actually expects to receive $480,000.