What is Realizable Value?

//What is Realizable Value?
What is Realizable Value? 2017-10-10T02:42:50+00:00

Definition: Realizable value is the net amount of money that you will to get from selling one of your assets. In other words, realizable value is equal to the sale price of an asset less any applicable fees. Notice this has nothing to do with the fair market value of the asset being sold.

What Does Realizable Value Mean?

This concept can also be applied to loans. In this case, it means the amount of money a lender expects to collect from his borrower. Most companies use some form of credit. Some companies have credit with vendors in the form of accounts payable while other companies have credit with customers in the form of accounts receivable. These lines of credit or borrowings are record on the books at their actual amount.

Example

In other words, if you buy a $50 sweater from JCPenny on a store credit card, JCPenny will record the transaction as a debit to accounts receivable. This $50 will stay in accounts receivable until you pay off the balance on the card. Sometimes people don’t actually pay of their credit cards. Over time JCPenny realizes that it won’t be able to collect the receivable and start the bad debt process.

Realizable value is the amount of a debt that is expected to be collected. Going back to our JCPenny example, if JCPenny feels like $25 out of the $50 will never get paid back, the realizable value of the accounts receivable is $25. This is the amount that JCPenny thinks it will actually be repaid.

The realizable value of accounts receivable on a balance sheet is usually shown with an allowance for bad debts accounts. The allowance for bad debts account is a contra asset account that reduces the accounts receivable account. JCPenny would show an accounts receivable of $50 on its balance sheet with a $25 balance in the allowance for doubtful accounts. Accounts receivable can either be shown with the allowance account or net of the allowance account.