How to Calculate Accounts Receivable Formula

Accounts 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 accounts receivable helps businesses manage cash flow, assess liquidity, and make informed financial decisions.

What is Accounts Receivable?

Accounts receivable (AR) is the balance of money owed to a company by its customers for goods or services provided on credit. It's a crucial component of a company's working capital and is recorded on the balance sheet as a current asset.

AR represents the company's short-term debt to customers and is typically collected within 30 to 90 days. A healthy accounts receivable balance indicates that your business is effectively managing its cash flow and customer relationships.

Accounts receivable is different from accounts payable, which represents money a company owes to its suppliers.

Accounts Receivable Formula

The basic formula for calculating accounts receivable is:

Accounts Receivable = Sales - Cash Received

This formula shows that accounts receivable is the difference between the total sales made on credit and the cash actually received from customers.

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

Accounts Receivable = (Average Daily Sales × Average Collection Period) - Cash Received

Where:

Average Daily Sales is the total sales divided by the number of days in the period
Average Collection Period is the average number of days it takes for customers to pay their invoices

How to Calculate Accounts Receivable

Calculating accounts receivable involves several steps:

Determine your total sales for the period
Subtract any cash received from customers
For a more precise calculation, calculate average daily sales and multiply by the average collection period
Subtract cash received to get the accounts receivable balance

Regularly calculating accounts receivable helps businesses:

Monitor cash flow
Assess liquidity
Identify collection trends
Make informed financial decisions

Accounts Receivable Example

Let's look at an example to illustrate how to calculate accounts receivable:

Suppose a company has the following data for a 30-day period:

Total sales: $100,000
Cash received: $70,000
Average collection period: 30 days

Using the basic formula:

Accounts Receivable = $100,000 - $70,000 = $30,000

For a more detailed calculation:

Average daily sales = $100,000 / 30 days = $3,333.33/day
Accounts receivable = ($3,333.33 × 30 days) - $70,000 = $100,000 - $70,000 = $30,000

This example shows that the company has $30,000 worth of invoices that have been issued but not yet paid.

Accounts Receivable vs Accounts Payable

While both accounts receivable and accounts payable represent money owed to or by a company, they serve different purposes and appear on opposite sides of the balance sheet.

Accounts Receivable	Accounts Payable
Money owed to the company by customers	Money owed by the company to suppliers
Recorded as a current asset	Recorded as a current liability
Improves cash flow when collected	Reduces cash flow when paid
Typically collected within 30-90 days	Typically paid within 30-60 days

Understanding the difference between accounts receivable and accounts payable is essential for managing a company's financial health and cash flow.

FAQ

What is the difference between accounts receivable and cash?

Accounts receivable represents money owed to your business by customers for goods or services delivered on credit. Cash, on the other hand, is the actual money your business has on hand. Accounts receivable will eventually become cash when customers pay their invoices.

How often should I calculate accounts receivable?

Accounts receivable should be calculated regularly, typically on a monthly or quarterly basis, to monitor your cash flow and collection trends. Daily calculations can also be useful for tracking short-term liquidity.

What is a good accounts receivable ratio?

A good accounts receivable ratio depends on your industry and business model. Generally, a ratio between 1:1 and 2:1 (accounts receivable to net sales) is considered healthy, indicating that your business is effectively managing its cash flow and customer payments.