Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio calculation
Accounts Receivable Turnover Ratio is the ratio of net credit sales to average accounts receivable.
Net credit sales represent the value of company’s products sold to customers without collecting the cash (on credit) in a particular time period (there are two kinds of sales: cash sales, which you now don’t include, and credit sales). Net credit sales equal gross credit sales less sales discounts related to credit sales less returns and allowances related to credit sales.
Average accounts receivable are just what they sound – the average balance of accounts receivable in a time period, calculated by adding up the beginning and ending balance of accounts receivable and dividing the result by two.
Practical use of Accounts Receivable Turnover Ratio
Accounts Receivable Turnover Ratio is used for analyzing how fast the company’s customers pay for the products they bought, or in other words, how successful the company is in making its customers pay as soon as possible.
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