5 Little-Known Things that Take Away from Gross Accounts Receivable

Are you struggling to collect payments from customers? Are you sending out invoices to customers in a timely manner but still writing off a number of bad debts? 

These situations can be a huge challenge for businesses. In fact, billing and invoicing and other areas of accounting can be incredibly frustrating, especially without a solid accounting system in place.

One crucial area of accounting is accounts receivable. However, there are different types of accounts receivables you need to monitor, especially if you want to ensure on-time customer payments. Keeping a close eye on your accounts receivable will help build overall financial preparation and management for the business.

Let's take a closer look at gross accounts receivable and why it is important for your business.

What is Gross Accounts Receivable?

Gross accounts receivable is the amount of sales, credits or open invoices that a business has sent to customers that have yet to receive payment. Once a payment is received then the invoice is closed and the payment is posted on the chart of accounts, which officially records the payment on the books.

Regardless of the type of accounting method used by a business, the gross receivable number is useful for estimating the amount of cash that a business is expected to earn at the time the invoices are due.

Gross vs. Net Accounts Receivable: What is the Difference?

Another important area to note is that gross accounts receivable is different from net accounts receivable. As mentioned above, gross accounts receivable refer to all open invoices. However, net accounts receivable is the likelihood of receiving payments from customers. In simpler terms, gross accounts receivable doesn’t take into account the probability of customer default whereas net accounts receivable does.

What Takes Away from Gross Accounts Receivable?

So how does a business factor in default payments into financial management? For a business to prepare for nonpayment, there are some other areas that take away from gross accounts receivable, which include the following:

  • Allowance for Bad Debt. This is also known as allowance for doubtful accounts. This offsets the balance in the gross accounts receivable line item. This allowance is an estimation of the total number of receivables that will not be paid.
  • Bad Debt Expense. This typically refers to a company’s loss due to good and/ or services that were sold or provided without collecting full payment. These non-payments eventually become “bad debts” and are written off as “bad debt” expenses. Bad debts ultimately impact net accounts receivable and are taken away from gross accounts receivable.
  • Cost of Capital. Aside from customer non-payments, another thing that takes away from receivables is the cost of capital, which is the cost of making a particular investment. Cost of Capital also involves a combination of debt and equity or the cost of the company’s funds.
  • Overhead to Collect Payments. In today’s digital age, many businesses rely on electronic forms of payment, such as credit card or square readers, PayPal, and accounting or bookkeeping software. However, to receive customer payments, many businesses must pay a fee per transaction and/ or deposit. Although this is just part of the cost of doing business, in the world of accounting this is known as Overhead to Collect Payments.
  • 20/10 Discounts. 20/10 discounts are a type of trade discount or a discount series, such as 20/10. A discount series is often offered to customers to make timely payments or to pay their balance in full. For example, 20 percent might be given to the customer at the time of the sale and then another 10 percent might be given if a payment is made on time.

How to Calculate Gross Accounts Receivable

Although most accounting and bookkeeping resources and software will calculate this figure, the formula is relatively easy. Here is how to calculate gross accounts receivable:

  • First locate net accounts receivables on the balance sheet.
  • Then, find allowance for doubtful accounts or allowance for bad debt on the balance sheet.
  • Add net receivables to the allowance for doubtful accounts to calculate gross receivables.

Let’s look at a quick, easy example: For the sake of easy math, let’s say a company has $1,000 in net accounts receivables and $50 for allowance for doubtful accounts. The company’s gross receivables would equal $1,050.

Although calculating and monitoring gross accounts receivable sounds complicated, the math is relatively easy to understand once you spend some time reviewing your business’ balance sheet.

If there is a huge difference between gross and net accounts receivable balances, then this should tell you that your business is dealing with some significant loss due to bad debts. If this is the case with you, it might be time to review your current credit policies as well as your invoice and payment terms.

Net 30 credit cost of accounts receivable

Posted in Finance, Management