What is the relationship between Net Accounts Receivable and the Allowance for Doubtful Accounts?

• A. Net AR = Accounts Receivable + Allowance for Doubtful Accounts
• B. Net AR = Accounts Receivable - Allowance for Doubtful Accounts
• C. Net AR = Revenue - Allowance for Doubtful Accounts
• D. Net AR = Accounts Receivable - Bad Debt Expense

Answer: (B)

Net accounts receivable is the amount the company expects to collect from its customers. It is calculated by subtracting the allowance for doubtful accounts from gross accounts receivable, yielding the net realizable value. The allowance is a contra-asset that reduces reported assets to reflect expected uncollectible amounts. For example, if gross accounts receivable is 100,000 and the allowance is 5,000, net accounts receivable is 95,000. Bad debt expense increases the allowance (and lowers net income in the period), while write-offs reduce both accounts receivable and the allowance, leaving net accounts receivable aligned with the amount expected to be collected. The other formulations would misstate assets or relate to income rather than the net realizable value of receivables.