Accounts receivable are often used as collateral for loans. If a company has a higher ratio, it shows that credit sales are more frequently collected vis-a-vis the company with a lower ratio. The accounts turnover ratio can also be used as an indication of the quality of receivables and credit sales. Availability of cash for the working capital, e.g., paying bills and other short-term liabilities. Higher efficiency is favorable as it provides a good liquidity position to the company. For example, if a company has an Accounts Receivables Turnover Ratio of 4, that means that the company is collecting its accounts receivable 4 times during the year (the company has a 90 Days cycle). Higher turnover ratios mean that the company is collecting the receivables more regularly in any financial year. The higher ratio is more favorable to business. It shows the ability of a business to collect its receivables. Use of Accounts Receivables Turnover Ratio We can calculate Average accounts receivable as Average Accounts receivable = (Opening Balance + Closing Balance) / 2 The money owed is against the goods or services bought by the customers on credit. It represents money owed by the customers to the company. Accounts receivable is a very important concept in business. Average accounts receivable: It is the average balance of the accounts receivable during any specific period of time.Net Credit Sales can be calculated as Net Credit Sales = Gross Credit Sales – Sales Return / Sales Allowances. It does not include any sales where the payment is made in cash immediately by the customers. Net Credit sales: It is the revenue sales generated by a company by allowing the extension of credit to customers less all sales returns and sales allowances.ExplanationĪccounts Receivables Turnover Ratio Formula majorly constitutes two variables: i.e., the estimated time Anand takes to collect the cash is 180 days in case of credit sales. It means Anand collects his receivables 2 times a year or once every 180 days. Now we can calculate Anand’s accounts receivable turnover ratio as follows:Īccounts Receivables Turnover Ratio Formula = Net Credit Sales / Average accounts receivableĪccounts Receivables Turnover Ratio Formula = $25,000/ $12,500. Average accounts receivables = (Opening Balance + Closing Balance)/2.Here, Net Credit sales = $40,000-$15000.Īnand Average accounts receivable can be calculated by taking an average of accounts receivable. Net Credit Sales= Gross Credit Sales – Sales Returns.We can calculate Net Credit sales after adjusting sales return, i.e., To calculate Anand’s turnover ratio, we need to calculate Net Credit Sales and Average accounts receivable. Anand’s last year’s balance sheet showed $15,000 of accounts receivable.Īs we know, the formula for Accounts Receivables Turnover Ratio is as follows:Īccounts Receivables Turnover Ratio Formula = Net Credit Sales / Average accounts receivable. The gross credit sales for the financial year were $40,000, and $15,000 was the sales returns. You can download this Accounts Receivables Turnover Ratio Template here – Accounts Receivables Turnover Ratio Template
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