How to Calculate Accounts Receivable
Accounts receivable is an important aspect of a company’s financial health as it represents the amount of money owed to the business by its customers for goods or services provided on credit. Calculating accounts receivable is a crucial step in assessing the company’s liquidity and managing cash flow effectively. Here are the steps to calculate accounts receivable:
Step 1: Determine the Starting Balance
Begin by identifying the accounts receivable balance at the beginning of the desired period. This can be found on the balance sheet or by referring to the previous period’s financial statements.
Step 2: Add Sales on Credit
Next, add the total sales made on credit during the period under consideration. These are sales where the payment is yet to be received. It is important to exclude any sales made for cash as they are not considered accounts receivable.
Step 3: Subtract Cash Collections
Deduct the cash collections received during the period from the total calculated in step 2. This will give you the net increase in accounts receivable.
Step 4: Add Ending Balance
Finally, add the ending accounts receivable balance to the net increase calculated in step 3. The ending balance can be found on the balance sheet or by referring to the current period’s financial statements.
The resulting figure will be the total accounts receivable at the end of the desired period.
Frequently Asked Questions (FAQs):
1. Why is calculating accounts receivable important?
Calculating accounts receivable helps businesses assess their overall financial health, manage cash flow, and determine the amount of money owed by customers.
2. Can accounts receivable be negative?
Yes, accounts receivable can be negative if the amount of cash collected exceeds the total sales made on credit during the period.
3. What is the average collection period?
The average collection period is the average number of days it takes for a company to collect its accounts receivable. It is calculated by dividing the accounts receivable balance by the average daily sales on credit.
4. How can I improve my accounts receivable turnover ratio?
To improve the accounts receivable turnover ratio, a company can offer discounts for early payment, tighten credit policies, or implement better collection procedures.
5. Can accounts receivable be written off as bad debt?
Yes, if a customer fails to pay their outstanding balance despite repeated attempts to collect, the accounts receivable can be written off as bad debt and deducted as an expense.
6. What is the difference between accounts receivable and accounts payable?
Accounts receivable represents the money owed to a company by its customers, whereas accounts payable represents the money owed by a company to its suppliers or creditors.
7. How can I track accounts receivable efficiently?
Using accounting software can help streamline the tracking process by automating calculations, generating reports, and sending reminders for overdue payments.