ACCOUNTS RECEIVABLE TURNOVER FORMULA EXAMPLE PLUS

ACCOUNTS RECEIVABLE TURNOVER FORMULA EXAMPLE PLUS

In that case, the students should use the total sales number given in the question as the numerator of the equation, assuming that all the sales have been made on account.Īverage receivables in denominator part of the formula are equal to opening receivables balance plus closing receivables balance divided by two.

The formula states that the numerator should include only credit sales however in examination problems, the examiners often don’t provide a separate breakdown of cash and credit sales. Two components of the formula of receivables turnover ratio are “net credit sales” and “average trade receivables”. The formula of receivables turnover ratio is given below:

The commercial entities should determine their receivables turnover ratio from time to time because it is directly linked with the availability of cash, or its equivalent, which they can use to meet their day to day operating expenses as well as their short-term obligations. Like some other activity ratios, receivables turnover ratio is expressed in times like 5 times per quarter or 12 times per year etc. This ratio, together with average collection period ratio, indicates how quickly a business entity is able to convert its credit sales into cash and thus helps in evaluating the liquidity of receivables the business owns.

It is computed by dividing the entity’s net credit sales by its average receivables for the period. Receivables turnover ratio (also known as debtors turnover ratio) is an activity ratio which measures how many times, on average, an entity collects its trade receivables during a selected period.

Accounts receivable turnover formula example