How to Calculate Accounts Receivable

Accounts receivable is a key financial metric that tracks 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) represents 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 balance sheet, showing the total amount of money that will be collected in the future.

Tracking accounts receivable helps businesses:

Monitor cash flow and liquidity
Assess the efficiency of credit policies
Identify potential bad debts
Make informed financial decisions

Accounts receivable is typically recorded as an asset on the balance sheet and is reduced as payments are received from customers.

Accounts Receivable Formula

The basic formula for calculating accounts receivable is:

Accounts Receivable = Total Sales - Cash Received

This formula shows that accounts receivable is the difference between what a company has sold and what it has actually received in cash.

For a more detailed calculation, you can use:

Accounts Receivable = (Average Accounts Receivable × Number of Days) / 365

Where:

Average Accounts Receivable is the average balance of money owed to the company
Number of Days is the average time it takes for customers to pay

How to Calculate Accounts Receivable

Step-by-Step Calculation

Determine your total sales for the period
Subtract the cash received from customers
The result is your accounts receivable balance

Pro Tip: For more accurate tracking, use the average accounts receivable method which considers the average balance over time rather than just the ending balance.

Using the Average Accounts Receivable Method

Calculate the average of your beginning and ending accounts receivable balances
Multiply this average by the number of days in the period
Divide by 365 to get the accounts receivable

Accounts Receivable Example

Let's calculate accounts receivable for a company with the following data:

Description	Amount ($)
Beginning Accounts Receivable	$5,000
Ending Accounts Receivable	$7,500
Number of Days in Period	90

Using the average accounts receivable method:

Average Accounts Receivable = ($5,000 + $7,500) / 2 = $6,250
Accounts Receivable = ($6,250 × 90) / 365 = $1,560.98

The company's accounts receivable for this period is $1,560.98.

Accounts Receivable vs Accounts Payable

While both accounts receivable and accounts payable track money owed to and by a company, they represent opposite financial flows:

Accounts Receivable	Accounts Payable
Money owed to the company by customers	Money owed by the company to suppliers
Increases when sales are made on credit	Increases when purchases are made on credit
Decreases when customers pay their invoices	Decreases when payments are made to suppliers
Shown as an asset on the balance sheet	Shown as a liability on the balance sheet

Understanding the difference between these two accounts is crucial for managing a company's cash flow and financial health.

FAQ

What is the difference between accounts receivable and cash received?

Accounts receivable represents the total amount of money owed to your business by customers for goods or services delivered on credit. Cash received is the actual amount of money that has been paid by customers. The difference between these two amounts is what's recorded as accounts receivable.

How often should I calculate accounts receivable?

Accounts receivable should be calculated regularly, typically on a monthly or quarterly basis, to monitor your company's cash flow and liquidity. This helps you identify trends and make informed financial decisions.

What factors can affect accounts receivable?

Several factors can affect accounts receivable, including the length of your customers' payment terms, the volume of sales on credit, the efficiency of your collections process, and economic conditions that may impact customers' ability to pay.

How can I improve my accounts receivable management?

To improve accounts receivable management, consider implementing better credit policies, offering flexible payment terms, using automated invoicing and payment reminders, and maintaining strong relationships with your customers to encourage timely payments.

What is the relationship between accounts receivable and working capital?

Accounts receivable is a key component of working capital, which represents the difference between a company's current assets and current liabilities. A higher accounts receivable balance can indicate better cash flow and liquidity, which is beneficial for working capital.