This is because the credit period given by the businesses to the customers to make the payment does not involve any interest charges. It is a business’ loss to wait longer to collect on its credit. Some businesses are able to collect their accounts receivables within 90 days, some take two months, some others take up to six months as well. The collection period often differs from business to business. It depicts the number of times a business can collect its account receivables in a given year.
#Receivables turnover ratio how to#
How to interpret the accounts receivable turnover ratioĪ business’s accounts receivable turnover ratio measures how well it can convert credit transactions into cash. Net credit sales = Credit Sales – Sales Returns – Sales Allowances (Discounts) Therefore, for the purpose of calculation of the Accounts Receivable Turnover Ratio, turnover will comprise of. The focus is only on credit sales here because cash sales do not create accounts receivables. Specific to the account receivables turnover ratio, the definition of turnover focuses mainly on credit sales.
(Accounts Receivables at the beginning of the year + Accounts Receivables at the end of the year) / 2 Turnover definition for businesses Because of this, businesses sell goods on credit to regular and reliable customers only to reduce the default risk.įor the purpose of calculation of the Accounts Receivable Turnover Ratio, Average Accounts Receivables will be. More often than not, a few of those receivables turn to doubtful debts and, eventually, bad debts, given the risk of non-payment. There is also an element of risk that cannot be ignored when it comes to accounts receivables. Since accounts receivables constitute money that is yet to be received (cash inflow), they are shown as assets in the business’s balance sheet. Businesses often offer a credit period to their customers to fulfil the payments conveniently, especially for bulk orders. Accounts receivable meaning and relevanceĪccounts receivables refer to all the customers that owe the business money for goods or services provided by the business.
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