How to Calculate Account Receivable

Account receivable is a key financial metric that represents money owed to your business by customers for goods or services delivered but not yet paid. Calculating account receivable helps businesses manage cash flow, track outstanding balances, and assess liquidity. This guide explains how to calculate account receivable, the formula used, and practical applications.

What is Account Receivable?

Account receivable (also called accounts receivable or A/R) is the balance of money owed to a company by its customers for goods or services provided. It represents the company's short-term assets and is a critical component of working capital.

Account receivable is recorded when a customer purchases goods or services on credit terms. The amount is added to the receivable account until payment is received. When payment is made, the receivable is reduced, and the cash is recorded in the cash account.

Key Points

Account receivable is a short-term asset
It represents money owed to your business
Helps track outstanding customer balances
Used to calculate days sales outstanding (DSO)

How to Calculate Account Receivable

Calculating account receivable involves tracking all sales made on credit and subtracting payments received. Here's a step-by-step process:

Identify all sales made on credit terms
Record each sale in your accounting system
Track payments received from customers
Subtract payments from total sales to determine current account receivable
Update the receivable balance regularly

The calculation becomes more precise when using the account receivable formula, which we'll discuss next.

Account Receivable Formula

The account receivable formula calculates the current balance of money owed to your business by customers. The basic formula is:

Account Receivable Formula

Account Receivable = Total Sales on Credit - Payments Received

Where:

Total Sales on Credit = Sum of all sales made on credit terms
Payments Received = Sum of all payments received from customers

For a more detailed calculation, you can use the following formula:

Detailed Account Receivable Formula

Account Receivable = (Beginning Account Receivable + Total Sales on Credit) - Payments Received

This formula accounts for the starting balance plus new sales, minus payments received.

Example Calculation

Let's walk through an example to demonstrate how to calculate account receivable.

Scenario

At the beginning of the month, your company had $5,000 in account receivable. During the month, you made $12,000 in sales on credit and received $8,000 in payments from customers.

Calculation

Beginning Account Receivable = $5,000
Total Sales on Credit = $12,000
Payments Received = $8,000
Account Receivable = ($5,000 + $12,000) - $8,000 = $9,000

The calculation shows your company has $9,000 in account receivable at the end of the month.

Account Receivable vs Account Payable

Account receivable and account payable are both important financial metrics, but they represent opposite sides of the transaction:

Account Receivable	Account Payable
Money owed to your business by customers	Money your business owes to suppliers
Represents short-term assets	Represents short-term liabilities
Increases when sales are made on credit	Increases when purchases are made on credit
Decreases when payments are received	Decreases when payments are made

Understanding the difference between these accounts helps businesses manage both cash inflows and outflows effectively.

FAQ

What is the difference between account receivable and accounts receivable?: The terms "account receivable" and "accounts receivable" refer to the same financial concept. The difference is purely in pluralization - "account receivable" is singular, while "accounts receivable" is plural.
How often should I calculate account receivable?: Account receivable should be calculated regularly, typically on a monthly basis or whenever significant transactions occur. This helps maintain accurate financial records and manage cash flow effectively.
What is a good account receivable ratio?: A good account receivable ratio depends on your industry and business size. Generally, a ratio between 10 and 30 days is considered healthy, indicating efficient collection of receivables.
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 balance can improve cash flow in the short term, but it also means your business has less liquidity available for immediate expenses.
What are the best practices for managing account receivable?: Best practices include setting clear payment terms, offering discounts for early payments, maintaining good customer relationships, and implementing effective collection procedures when necessary.