Valuation of Receivables
Net Realizable Value
Receivables are reported at net realizable value (NRV), which is the amount the company expects to collect. Because some customers may fail to pay, companies estimate expected credit losses through an allowance account.
Net Realizable Value = Gross Receivables − Allowance for Credit Losses
Note
Receivables are not reported at their gross balance when collection is uncertain.
Summary
The allowance approach ensures receivables are reported at the amount expected to be collected.