Now she focuses on careers, personal financial matters, small business concerns, accounting and taxation. She has written content for online publication since 2007, with earlier works focusing more in education, craft/hobby, parenting, pets, and cooking. Laura Chapman holds a Bachelor of Science in accounting and has worked in accounting, bookkeeping and taxation positions since 2012. My Accounting Course: Accounts Receivable Turnover Ratio.
Average accounts receivable formula how to#
Accounting Tools: How to Calculate Average Accounts Receivable.It also allows the business to examine whether or not their credit policies are too restrictive or too generous. Not only is this important information for creditors, but it also helps the business more accurately plan its cash flow needs. This means that Primo collects nearly their entire AR balance at least eight times per year and that it is taking about one-and-a-half months or about 45 days after a sale is made to collect the cash. If we divide $400,000 by $46,000, we see that Primo has AR turnover of 8.7. From the previous example, Primo's average accounts receivable was $46,000. Generally, you can find a company's credit sales on their income statement.įor the year 2017, Primo Pet Supplies Company had $400,000 in credit sales. Cash sales are left out because they do not affect receivables. The formula for the accounts receivable turnover ratio is net credit sales divided by average accounts receivable. But is the company collecting on those sales, or are they giving goods or services away for free? The accounts receivable turnover ratio helps you examine how many times you are collecting AR, thus turning receivables into cash. It shows the company is making sales, which is great. Comparing the two figures, you can see that using 13 months gave you a higher number, which more accurately considers the higher months like July and August.Ĭalculating the Accounts Receivable Turnover RatioĪverage accounts receivable gives you some information, but not much. You divide that by the number of data points which is 13 and gives you average accounts receivable of $46,000. If you calculate instead by the 13-month average, you will add up all the figures, which gives you $598,000. You would then divide that by 2, since that is how many data points you used, to get the $42,000 figure.
Average accounts receivable formula plus#
You would add the two December figures, $40,000 plus $44,000, to get $84,000. If you use the first method, where we average the two year-end figures, the average accounts receivable would be $42,000. Primo Pet Supplies Company has the following balances in their accounts receivable, according to their balance sheets: How to Calculate Average Accounts Receivable Examples
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