Accounts receivable is a financial claim or declaration which signifies that seller receives cash from the buyer for the goods or services received within a short period. This is reported as current asset on the balance sheet because it is a short-term claim. The customer does not pay any interest on the principal amount as is customary for notes receivable (long-term).
A seller executes an accounts receivable claim by generating and issuing invoice to the customer. The customer obliges to pay the amount on the specified terms of payment. To attract early payments from customers, the sellers provide discount. Such discounts would be specified as Net 30, Net 45, or Net 60 as the payment or credit terms.
Accounts receivable, net : An organization may not collect all the amount as mentioned in the accounts receivable claim. Some reasons for not collecting the total amount of accounts receivable are customer might not have enough money to pay the billed amount, difficult to trace the customer who has not paid the full amount. So the organization could not collect the gross accounts receivables. Accounts receivable, net means the amount of gross accounts receivable minus bad debts and contractual allowance.
Generally companies follow two methods to measure accounts receivable, net. One is allowance method. As the uncollectible accounts cannot be estimated at the time of sales on account, companies make an estimated percentage as to how much amount could be uncollectible. This is allowance method. The other method is direct write-off method. The bad debt amount which is considered as uncollectible is deducted from gross accounts receivable.