Accounts Receivable Turnover

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Definition: Accounts Receivable Turnover

Accounts receivable turnover forms a part of the ratio analysis of a firm. It is the ratio which quantifies the effectiveness of a firm’s policy with regards to credit extension and collection of debt. It measures the number of times, the credit is collected throughout an year.

Mathematically, it is expressed as:


Formula:

Accounts Receivable Turnover=  (Net Credit Sales)/(Average Accounts Receivable)


A high value for the ratio implies that the firm follows a tight credit policy and manages its receivables efficiently while a low value implies that there are some collection problems and there is need for improvement.

Some firms may not have data about the credit sales and hence net sales is used which makes the ratio a bit deceiving depending on the proportion of cash sales.


Example

Assume,

Annual Credit Sales = Rs. 10,000

Accounts receivable at the beginning of the year = Rs. 1000

Accounts receivable at the end of the year = Rs. 3000

So,

Average Accounts receivable = (1000 + 3000)/2 = Rs. 2000

Accounts Receivable turnover = 10000/2000 = 5


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