Account receivable turnover ratio is also known as efficiency ratio or activity ratio. It is used to measure that the number of times in which the business turn its account receivable into cash. Simply we can say that the accounts receivable turnover ratio measure that how many time the business can collect its average account receivable during one year.
A turn means that at each time company collect its average receivable. If the average receivable of the company is $10000 n 1 year and then collect 20,000 of the receivable in 1 year then it means that the company’s receivable amount collection is twice.
This ratio used to find the efficiency of the collection of the credit of the company from the credit. For the collection of credit, some company takes time of 3 months whereas some company takes time of 6 months.
We can view the receivable turnover ratio as a liquidity ratio. If the company take less time to convert its receivable into cash then the company is more liquid.
When we divide net credit sales by average account receivables then we get accounts receivable turnover ratio.
Instead of net sales here net credit use because cash sale does not create the receivable amount. Only receivable amount created by the credit sales that’s why cash sales remove from the above formula.
Average receivable calculates by the sum of beginning and end receivable for the year and then divide that sum by 2.
Receivable turnover ratio is used to measure the ability of the company to collect the receivables from the customer.
If the ratio is high then it means that the company is very good for collecting receivables from the company but if the ratio is low then it is bad for the company. If the ratio result is 2 then it means that company receivable turnover is twice and after 6-month the company collects money from the customer.
If the ratio is 4 then after 3-month company collects money fro its customer.
So if the collection of the money is good of the company then company use that cash to pay the bill in time and other obligation sooner.
For the measuring of the quality of the credit sales and receivables account receivable turnover ratio mostly use. High ratio company collects amount efficiently from the customer as compared to the low ratio amount.
mani’s shop is a retail store. In the balance sheet, $20,000 is receivable after a year. Gross credit sale is $75000, and return is $25000. The balance sheet of last year receivable account shows $10,000.
For the calculation of the account receivable turnover ratio, we need net credit sales and average receivable account. When we subtract return from gross credit sale then we get net credit sales so (75000-25000=50,000).
Average account receivable can get by the sum of beginning and ending receivable account and divided by 2 that is (10,000+20,000)/2=15000
Now Accounts Receivable Turnover Ratio is
From the above result it is clear that mani turnover receivable is 3.33 or after 110 days mani collect the amount from its customer.
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