How To Calculate Accounts Receivable Turnover Ratio?

Every business has clients that make payments after a certain gap of receiving products and services. And if you maintain proper accounting for your business, both dues and receipts are recorded separately, especially if the dates differ. This helps to know how efficiently the business can collect the turnover of accounts receivable, also known as the accounts receivable turnover ratio or debtor’s turnover ratio.

The ratio helps you understand how many times you have collected your debts in a given time period. Thus, there is a specific formula in accounting for calculating it.

The Formula for Calculating Turnover of Accounts Receivable

The ratio only includes credit sales your company makes. The formula for it is as follows:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Here, net credit sales = Total credit sales – sales returns – sales allowances, and,

Average accounts receivable = Accounts receivable in the beginning of the time period + accounts receivable in the end of the time period / 2

Let’s understand this with a simple example.

Company ABC makes total credit sales of ₹50,000 in a month. Sales worth ₹5,000 are returned. In the beginning of the month, accounts receivable is ₹7,000 and in the end of the month, the accounts receivable is ₹12,000. 

What is the turnover of accounts receivable in that month?

Net Credit Sales = ₹ (50,000 – 5,000)

               = ₹45,000

Average Accounts Receivable = ₹ (7,000 + 12,000) / 2

          = ₹19,000 / 2

          = ₹9,500

Accounts Receivable Turnover Ratio = ₹45,000 / ₹9,500

                                                                   = 4.74

Usually, the higher the number, the more efficient the company is.