The accounts receivable balance is $20,000 and the allowance for bad debts has a credit balance of $4,000 at the end of the year. what is the net realizable value of accounts receivable at the end of the year?

$16,000

Explanation:

The account receivable is an asset. It is the account that shows how much you expect to receive from your customers as a result of selling to them on credit.

Due to the accrual accounting principle, as long as risks and rewards have been exchanged, business entities are to record the transaction whether cash has been received from those transactions or not.

An allowance for bad debt is a contra account to the account receivable.

A contra account is an account that causes a reduction in the value of an original account. In this case, the allowance for bad debt causes a reduction in the account receivable account.

What this means is that we are expecting some of the customers who we are expecting to receive from not to pay us. Meaning the amount we are expecting as receivables will reduce.

To reduce an asset account/ to reduce a debit balance, we would credit the corresponding account.

Thus in this case the question is saying that out of the $20,000 we are expecting to receive from customers, we are creating an allowance for $4,000 that might not be received from the customers, either due to previous experience or personal judgement.

Therefore, our receivables balance at the end of the year = $20,000 - $4,000 = $16,000.

I hope this helps you understand the question better and you can solve similar questions .

$16,000

Explanation:

You will always subtract the Allowance for bad debts from the account receivables to get the net realizable value

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