The term accounts receivable valuation describes the methods used to determine the value of accounts receivable appearing on the company's balance sheet. Typical adjustments to accounts receivable can include discounts, sales returns, and uncollectable accounts.
Not all sales will result in money collected from customers. The matching principle requires companies to align revenues, an income statement item, with receivables, which appears on the balance sheet. When initially valuing accounts receivable, the company needs to consider discounts offered to customers and trade partners.
If a credit sale involves a trade discount, the amount booked to accounts receivable is the net billed the trade partner. Recording of cash discounts can be accomplished using one of the below approaches:
The next step in the valuation of accounts receivable involves adjustments for sales returns and uncollectable amounts.
Sales returns and uncollectibles are known as special allowance accounts, which are contra accounts to accounts receivable. Once these two adjustments have been completed, accounts receivable will appear on the balance sheet in a form known as net realizable value.