![]() ![]() For the same period, the net credit sales amounted to $2,890,000. In the opening balance sheet for the year just ended, the company’s accounts receivable balance $55,345. In addition, John is supposed to submit his assessment of the company’s efficiency in terms of revenue collection during this period in comparison to the past year. John, a junior accountant at a food company, has been requested by his seniors to compute the accounts receivable turnover ratio for year just ended. Let us see how this formula works in an example. To this end, one computes the sum of the beginning accounts receivable and the ending accounts receivable and then divide by two.Īccounts Receivable Turnover Ratio Example On the other hand, there is the average of accounts receivable for the period in consideration. ![]() If the period under consideration is one financial year, then the accountant will put together the net sales for which the customers have not paid in yet during that year. The two main components used in computing accounts receivable ratio are net credit sales for the period in consideration. Also, this ratio informs a business of where it stands relative to competitors in the industry.Īccounts Receivable Turnover Ratio Formula For example, the ratio for the just ended financial year may be compared to the previous year to gauge where the business stands in terms of revenue collection efficiency. Typically, the receivable turnover ratio enables businesses to keep track of their performance over the years. This is because unadjusted total credit sales lead to inflated readings. If the gross credit sales are used, the business is likely to come up with a wrong result. Important to note, businesses use the net credit sales to compute the receivable turnover ratio. Also known as debtor’s turnover ratio, the accounting metric displays the businesses’ efficiency when it comes to using assets. This ratio tells stakeholders how quickly a business can convert credit extended to customers into cash. The more efficient a company is at collecting its receivables, the more positive its cash flow situation, and the more capable it will be of meeting its financial obligations.Ī higher A/R turnover ratio also demonstrates that, since a business is more likely to collect on its debts in a timely manner, it makes a better candidate for borrowing funds.Įfficient operations and a quality credit rating are both desirable attributes of any company you may be considering as an investment.What is the Accounts Receivable Turnover Ratio?ĭefinition: The accounts receivable turnover ratio is an accounting measure that quantifies how effective a company is, at collecting receivables from clients. So what does the accounts receivable turnover ratio measure? If an organization’s AR turnover ratio is 4, as in the example of Company Z, it means it collects its average accounts receivable amount four times a year, or about every 90 days. This means that it’s better at converting its outstanding credit sales into cash more frequently throughout the year. The higher a firm’s AR turnover ratio is, the more efficient it is at collecting its customer receivables. ![]() so what does accounts receivable turnover mean? Okay now let's see how the accounts receivable turnover is used to analyze a company's efficiency. ![]()
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