Blog · Finance metrics and formulas · Finance and FP&A teams
The accounts receivable formula reconciles an opening customer balance to the closing ledger. Work through invoices, cash, credits, write-offs and adjustments, then bridge gross receivables to the net balance.
The accounts receivable formula takes an opening balance, adds credit invoices and subtracts collections and other reductions to reach the ending balance. A useful receivables calculation also explains each movement by customer and proves that the total agrees with the closing ledger. Gross receivables and the credit-loss allowance need separate reconciliations.
Ending gross accounts receivable = Opening gross receivables + Credit invoices − Cash applied − Credit memos − Write-offs + Signed adjustments
Ending net accounts receivable = Ending gross receivables − Closing allowance for credit losses
Signed adjustments are positive when they increase the customer balance and negative when they reduce it. Keep debit memos, currency movements, transfers and manual journals identifiable rather than hiding them in collections.
Use a fixed reporting boundary: the same legal entity, trade receivable accounts, reporting currency and posting period throughout. A balance is measured at a date, while movements cover the interval between dates. The SEC's guide to financial statements explains this distinction between balance-sheet amounts at a point in time and financial activity over a period.
This calculation answers why the balance changed. The AR turnover ratio answers a different question about collections relative to average receivables; use its method after the balance has reconciled.
Bring the prior month's closing customer balances, the current month's posted transaction register and the current closing aging report. Include transaction ID, customer ID, invoice ID, posting date, transaction type, original currency, reporting-currency amount and receipt allocation reference.
An invoice-level register is better than a customer summary for finding differences. One receipt can settle several invoices; several receipts can settle one invoice. Preserve each allocation once and retain the receipt ID so its allocated total can be checked against the receipt register.
Cash applied means the amount credited to these customer accounts. Money received but held as an unapplied deposit may sit elsewhere in the ledger. Reconcile that money separately rather than forcing it into an invoice balance it has not reduced.
If invoices include sales tax, keep tax in both invoice movements and customer balances. A revenue-only sales export will not reconcile to tax-inclusive receivables without a tax bridge. Exclude cash sales and non-trade amounts unless the opening and closing account scope explicitly includes them.
A US industrial distributor reconciles September 2026. Opening balances are at August 31 and closing balances at September 30. All figures below are hypothetical USD amounts, shown in whole dollars with no rounding required.
| Customer | Opening AR (USD) | Credit invoices (USD) | Cash applied (USD) | Credits (USD) | Write-offs (USD) | Signed adjustments (USD) | Ending gross AR (USD) |
|---|---|---|---|---|---|---|---|
| Atlas Supply | 120,000 | 180,000 | 165,000 | 5,000 | 2,000 | 1,000 | 129,000 |
| Beacon Parts | 80,000 | 120,000 | 110,000 | 3,000 | 0 | -1,000 | 86,000 |
| Cedar Industrial | 50,000 | 75,000 | 65,000 | 2,000 | 3,000 | 0 | 55,000 |
| Total | 250,000 | 375,000 | 340,000 | 10,000 | 5,000 | 0 | 270,000 |
Atlas's closing balance is $120,000 + $180,000 − $165,000 − $5,000 − $2,000 + $1,000 = $129,000. The signed adjustments transfer a balance between Atlas and Beacon, so they affect the customer rows but cancel at company level.
The same total can be rebuilt one step at a time:
| Step | Movement (USD) | Running balance (USD) |
|---|---|---|
| Opening gross receivables | 250,000 | 250,000 |
| Add credit invoices | 375,000 | 625,000 |
| Subtract cash applied | -340,000 | 285,000 |
| Subtract credit memos | -10,000 | 275,000 |
| Subtract write-offs | -5,000 | 270,000 |
| Add net signed adjustments | 0 | 270,000 |
The ending balance rises by $20,000 even though collections were substantial. That is a movement explanation, not proof of deteriorating collections. The accounts receivable collection rate uses a defined denominator to assess the cash collected.
The allowance does not represent a customer payment. OpenStax's allowance-method explanation identifies the allowance as a contra-asset deducted from receivables and shows that a write-off reduces both gross receivables and the allowance.
Suppose the allowance ledger has these movements:
| Allowance step | Amount (USD) |
|---|---|
| Opening credit balance | 12,000 |
| Add period credit-loss expense | 7,000 |
| Subtract write-offs charged to the allowance | -5,000 |
| Closing credit balance | 14,000 |
Opening net receivables were $250,000 − $12,000 = $238,000. Closing net receivables are $270,000 − $14,000 = $256,000. Net receivables therefore increased by $18,000: the $20,000 gross increase less the $2,000 increase in the allowance.
There is a second proof: $238,000 + $375,000 − $340,000 − $10,000 − $7,000 = $256,000. The write-off cancels between gross receivables and the allowance; deducting it again in this net bridge would count the reduction twice.
First, sum the customer closing balances: $129,000 + $86,000 + $55,000 = $270,000. That total must agree with the September 30 gross aging report and the gross receivables control account. Compare the $14,000 allowance with its separate ledger account before comparing the $256,000 net balance with financial reporting.
Next, check movement populations independently. Invoice totals should match the receivables-side postings from billing. Cash allocations should match receipt applications. Credits and write-offs should match their approved registers. A perfect ending tie can still hide an omitted invoice and an omitted payment of equal amounts.
Retain customer differences even when their company total is zero. The transfer above is an example: a company-level tie cannot prove that each customer's statement is correct. A recurring accounts receivable dashboard can use the reconciled totals, while investment in accounts receivable addresses the separate funding question.
Bring your opening balances, transaction export and closing aging file to Covirage; its tools map the columns, compute the movements and check the figures. The external AI model explains the differences with every figure traced to its rows. Create a free Covirage account and bring a sample of your own export.
See Covirage for finance teams for the broader reporting context.
No. Credit sales add to receivables, but the balance also contains unpaid invoices from earlier periods and is reduced by collections and other adjustments. Cash sales do not create an unpaid customer balance.
No. A write-off removes an amount from gross receivables without collecting cash. Show it in a separate movement category so a lower ending balance cannot be mistaken for improved customer payments.
Start with gross customer balances to reconcile invoices and settlements. Reconcile the allowance separately, then subtract its closing balance from gross receivables. This keeps changes in credit-loss estimates separate from customer transaction movements.
Possible causes include different cutoff dates, direct ledger journals, omitted customer accounts, unapplied cash and foreign currency adjustments. Compare the same entities, currencies and posting dates, then identify the specific unmatched transactions rather than inserting a balancing adjustment.