How to Calculate Gross Accounts Receivable

Accounts receivable (AR) represents money owed to a business for goods or services delivered but not yet paid for. It appears as a current asset on a company’s balance sheet, signifying expected future cash inflow. Managing these receivables is important for a business’s financial health, directly influencing its cash flow. This article explains how to calculate the gross amount of accounts receivable, a fundamental step in understanding a company’s financial position.

Understanding Gross Accounts Receivable

Gross accounts receivable refers to the total amount of money owed to a company by its customers for products or services provided on credit, before any deductions or adjustments. This figure represents the total face value of all outstanding invoices, regardless of whether they are due now or in the future. It does not account for potential uncollectible amounts, such as bad debts or returns. Understanding this gross figure is important for assessing a company’s total sales on credit and provides a comprehensive view of the credit extended to customers.

Identifying Relevant Transactions

To calculate gross accounts receivable, a business must identify all transactions where goods or services were provided on credit and payment has not yet been received. This primarily involves reviewing sales invoices issued to customers. Only sales made on credit terms contribute to accounts receivable; cash sales are excluded since payment is received immediately. Accurate invoicing and diligent record-keeping are important for identifying and tracking all outstanding amounts.

Steps to Calculate Gross Accounts Receivable

Calculating gross accounts receivable involves summing the total value of all outstanding sales invoices issued on credit as of a specific date. This figure includes every amount that customers owe, regardless of whether the payment is currently due or will be due in the future. To perform this calculation, a business should gather all uncollected invoices or records of credit sales from its accounting system. The total sum of these amounts represents the gross accounts receivable at that point in time.

Illustrative Examples

Consider a small business, “Tech Solutions Inc.,” at the end of its fiscal quarter. Tech Solutions provided services on credit to several clients and needs to calculate its gross accounts receivable.

Scenario 1

On March 15, Tech Solutions completed a project for Client A, invoicing them $2,500 with payment due in 30 days. On March 20, Client B was invoiced $1,800 for software installation, due in 45 days. By March 31, neither invoice had been paid. To calculate gross accounts receivable, Tech Solutions adds these outstanding amounts: $2,500 (Client A) + $1,800 (Client B) = $4,300. This is the gross accounts receivable.

Scenario 2

Expanding on the previous example, suppose Tech Solutions also has an older invoice for Client C from February 10 for $1,200, which was due on March 10 but remains unpaid. At the end of the quarter, the calculation would include all three outstanding invoices: $2,500 (Client A) + $1,800 (Client B) + $1,200 (Client C) = $5,500. This is the gross accounts receivable.