Account Receivable Calculation Example

Account receivable is a key financial metric that represents the money owed to your business by customers for goods or services delivered but not yet paid for. Calculating account receivable helps you manage cash flow, assess your company's financial health, and make informed business decisions.

What is Account Receivable?

Account receivable (AR) is the balance of money your business is owed by customers for goods or services provided but not yet paid. It's a crucial component of your company's working capital and plays a significant role in your cash flow management.

Account receivables are recorded on your company's balance sheet under the "Current Assets" section. They represent a short-term liability that will be converted into cash as customers pay their invoices.

Account receivables are different from accounts payable, which represent money your business owes to suppliers.

Account Receivable Formula

The basic formula for calculating account receivable is:

Account Receivable = Sales - Cash Received

Where:

Sales - Total revenue from sales during a specific period
Cash Received - Amount of money actually received from customers for those sales

This formula shows the difference between what your business has earned and what it has actually collected in cash.

How to Calculate Account Receivable

Step 1: Determine Your Sales

Calculate your total sales for the period you're analyzing. This includes all revenue from sales of goods or services.

Step 2: Calculate Cash Received

Determine how much cash you've actually received from customers for those sales. This includes payments from customers, including cash, checks, credit card payments, and electronic transfers.

Step 3: Apply the Formula

Subtract the cash received from your total sales to find your account receivable.

Step 4: Analyze the Result

Interpret the account receivable figure in the context of your business. A high account receivable might indicate good sales but slow payment collection, while a low account receivable suggests efficient cash collection.

Example Calculation

Let's look at an example to illustrate how to calculate account receivable.

Scenario

During the month of June, Company XYZ had total sales of $50,000. They received $42,000 in cash from customers during this period.

Calculation

Using the formula:

Account Receivable = Sales - Cash Received
Account Receivable = $50,000 - $42,000
Account Receivable = $8,000

Interpretation

The $8,000 account receivable means that Company XYZ has earned $50,000 in sales but has only received $42,000 in cash payments. The remaining $8,000 represents money owed to the company by customers for goods or services delivered.

Account Receivable Table

Here's a table showing account receivable calculations for different scenarios:

Month	Sales	Cash Received	Account Receivable
January	$45,000	$40,000	$5,000
February	$52,000	$48,000	$4,000
March	$60,000	$55,000	$5,000
April	$48,000	$42,000	$6,000

This table shows how account receivable can vary month-to-month based on sales and cash collection patterns.

FAQ

What is the difference between account receivable and accounts payable?: Account receivable represents money owed to your business by customers for goods or services delivered. Accounts payable represent money your business owes to suppliers for goods or services received.
How do I reduce my account receivable?: You can reduce account receivable by improving your credit terms, offering discounts for early payment, implementing better collection procedures, and negotiating with slow-paying customers.
What is a good account receivable ratio?: A good account receivable ratio depends on your industry and business model. Generally, a ratio between 10-20% of your total sales is considered healthy, but this can vary based on your specific circumstances.
How does account receivable affect cash flow?: Account receivable affects cash flow by representing money that will be received in the future. A higher account receivable can provide liquidity in the short term but may indicate potential collection issues if not managed properly.
What is the difference between account receivable and receivables turnover?: Account receivable is the actual amount of money owed to your business. Receivables turnover is a ratio that measures how efficiently your company collects payments from its customers.