Account Receivable Calculation Formula

Account receivables are amounts owed to your business by customers for goods or services delivered but not yet paid. Calculating account receivables helps businesses manage cash flow, track outstanding balances, and assess credit performance.

What is Account Receivable?

Account receivable (AR) represents money owed to your business by customers for goods or services provided. It's a key metric in financial accounting that helps businesses track outstanding balances, manage cash flow, and assess credit performance.

Account receivables are recorded on a company's balance sheet under current assets. They typically include invoices issued to customers but not yet paid, as well as any discounts or allowances granted to customers.

Account receivables are different from accounts payable, which represent money a company owes to suppliers or vendors.

Account Receivable Formula

The basic formula for calculating account receivables is:

Account Receivables = Total Sales - Cash Received

This formula shows the difference between what your business has earned from sales and what it has actually received in cash payments.

For a more detailed calculation, you can use:

Account Receivables = (Average Daily Sales × Average Collection Period) - Cash Received

Where:

Average Daily Sales = Total Sales / Number of Days in Period
Average Collection Period = Average number of days it takes to collect payments

How to Calculate Account Receivables

Determine your total sales for the period
Subtract the cash received from customers
For a more detailed calculation, calculate average daily sales and multiply by the average collection period
Subtract cash received from this amount to get account receivables

Regularly calculating account receivables helps businesses:

Monitor cash flow
Assess credit performance
Identify potential payment issues
Make informed financial decisions

Example Calculation

Let's calculate account receivables for a company with the following data:

Metric	Value
Total Sales	$50,000
Cash Received	$35,000
Average Collection Period	30 days

Using the basic formula:

Account Receivables = $50,000 - $35,000 = $15,000

For the detailed calculation:

Average Daily Sales = $50,000 / 30 days = $1,666.67/day

Account Receivables = ($1,666.67 × 30) - $35,000 = $50,000 - $35,000 = $15,000

In this example, the company has $15,000 worth of outstanding receivables.

FAQ

What is the difference between account receivable and accounts payable?: Account receivable is money owed to your business by customers, while accounts payable is money your business owes to suppliers or vendors.
How often should I calculate account receivables?: Account receivables should be calculated regularly, at least monthly, to monitor cash flow and financial health.
What factors can affect account receivables?: Factors that can affect account receivables include credit terms, payment delays, economic conditions, and industry trends.
How can I improve my account receivables?: Improving account receivables can be achieved through better credit terms, faster invoicing, improved collections processes, and maintaining good customer relationships.
What is a good account receivable ratio?: A good account receivable ratio depends on your industry and business size, but generally, a ratio between 10-30 days is considered healthy.