How Do You Calculate Accounts Receivable

Accounts receivable is a key financial metric that represents the money owed to your company by customers for goods or services delivered but not yet paid for. Calculating accounts receivable helps businesses track cash flow, assess liquidity, and make informed financial decisions.

What is Accounts Receivable?

Accounts receivable (AR) is the balance of money that customers owe to your business for goods or services provided but not yet paid. It's a crucial component of a company's working capital and is recorded on the balance sheet as a current asset.

Tracking accounts receivable helps businesses understand:

The amount of cash coming in from customers
How efficiently they collect payments
Their overall financial health and liquidity

Accounts receivable is different from accounts payable, which represents money owed to suppliers for goods or services received but not yet paid.

How to Calculate Accounts Receivable

Calculating accounts receivable involves tracking all outstanding invoices and credit memos issued to customers. Here's a step-by-step process:

List all unpaid invoices and credit memos
Sum the amounts of all outstanding invoices
Subtract any credit memos that have been issued
Record the final amount as your accounts receivable balance

This calculation should be done regularly, typically monthly, to maintain accurate financial records.

Accounts Receivable Formula

The basic formula for calculating accounts receivable is:

Accounts Receivable = Total Invoices - Credit Memos

Where:

Total Invoices - The sum of all unpaid invoices issued to customers
Credit Memos - Any refunds or discounts issued to customers

For a more detailed calculation, you might also consider:

Accounts Receivable = Beginning Balance + New Invoices - Payments Received - Credit Memos

This extended formula accounts for the previous period's balance and any payments received during the current period.

Accounts Receivable Example

Let's look at a practical example to illustrate how to calculate accounts receivable.

Scenario

At the beginning of the month, your company had $5,000 in accounts receivable. During the month, you issued $12,000 in new invoices and received $8,000 in payments from customers. You also issued $500 in credit memos.

Calculation

Using the extended formula:

Accounts Receivable = $5,000 (Beginning Balance) + $12,000 (New Invoices) - $8,000 (Payments Received) - $500 (Credit Memos)

= $5,000 + $12,000 = $17,000

= $17,000 - $8,000 = $9,000

= $9,000 - $500 = $8,500

Therefore, your company's accounts receivable at the end of the month is $8,500.

Accounts Receivable vs Accounts Payable

While both accounts receivable and accounts payable are important financial metrics, they represent opposite sides of the cash flow equation:

Accounts Receivable	Accounts Payable
Money owed to your company by customers	Money your company owes to suppliers
Recorded as an asset on the balance sheet	Recorded as a liability on the balance sheet
Increases when you issue invoices	Increases when you receive goods/services
Decreases when customers pay	Decreases when you pay suppliers

The relationship between these two metrics is crucial for understanding a company's cash flow and financial health. A healthy balance between accounts receivable and accounts payable indicates good liquidity and efficient operations.

FAQ

What is the difference between accounts receivable and revenue?

Accounts receivable represents money owed to your company for goods or services delivered but not yet paid, while revenue is the total income generated from sales before any deductions. Revenue becomes accounts receivable when it's recorded as an asset on the balance sheet.

How often should I calculate accounts receivable?

Accounts receivable should be calculated regularly, typically monthly, to maintain accurate financial records. This helps you track cash flow and make informed business decisions.

What is a good accounts receivable ratio?

There's no single "good" ratio as it depends on your industry and business model. However, a healthy accounts receivable ratio typically indicates that your company is collecting payments efficiently and maintaining good liquidity.