net realizable value of receivables
/ N-R-V /
Suppose customers owe your shop 100,000 in total, but you honestly expect a few of them never to pay, costing you maybe 4,000. How much are those receivables really worth to you? Not the full 100,000 you billed, but the 96,000 you realistically expect to collect. That realistic figure is the net realizable value of your receivables.
Net realizable value of receivables is the gross accounts receivable minus the allowance for doubtful accounts: the amount of cash the company actually expects to collect. It is the number reported on the balance sheet for receivables, because reporting the full billed amount would overstate the asset. If receivables are 100,000 and the allowance is 4,000, the net realizable value is 96,000. As specific accounts are written off, both the gross receivable and the allowance fall together, so this net figure is unaffected by the write-off — it already anticipated the loss.
Reporting receivables at net realizable value is an application of the conservatism principle and a major reason the allowance method exists: it keeps assets from looking better than they really are. The same logic — carry an asset at the cash you can realistically get from it — also appears with inventory, though inventory's NRV is computed differently. A common slip is to read the gross receivables figure and treat it as cash to come; the net realizable value is the more honest number to trust.
A company's ledger shows gross accounts receivable of 250,000 and an allowance for doubtful accounts of 9,000. The balance sheet reports receivables at their net realizable value of 250,000 − 9,000 = 241,000 — the cash the company truly expects to bring in.
Gross billed minus the expected loss equals the receivables figure actually shown on the balance sheet.
Writing off a specific account does not change net realizable value — the gross receivable and the allowance both fall by the same amount, since the loss was already provided for.