How to Calculate Accounts Receivables

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 Are Accounts Receivables?

Accounts receivable (AR) is an asset account that records the money owed to a company by its customers for goods or services provided on credit. It represents the short-term obligations that will be collected in the near future.

Tracking accounts receivable is essential for businesses because it provides insights into:

Cash flow management
Collection efficiency
Working capital
Financial health

Understanding accounts receivable helps businesses optimize their credit policies, improve collection processes, and maintain healthy financial ratios.

How to Calculate Accounts Receivable

Calculating accounts receivable involves determining the total amount of money owed to your company by customers. Here's a step-by-step guide:

Identify all outstanding invoices that have been issued to customers but not yet paid.
Sum the amounts of all unpaid invoices.
Adjust for any allowances or discounts that may have been granted.
Record the total as your accounts receivable balance.

This calculation provides a snapshot of your company's short-term obligations and helps in financial planning and analysis.

Accounts Receivable Formula

The basic formula for calculating accounts receivable is:

Accounts Receivable = Total Sales - Cash Received

Where:

Total Sales - The total amount of goods or services sold on credit
Cash Received - The amount of money actually received from customers

This formula gives you the net amount owed to your company by customers for goods or services delivered but not yet paid for.

Note: Accounts receivable can also be calculated using the aging of receivables method, which breaks down the accounts by age (current, 30-60 days, 60-90 days, etc.).

Accounts Receivable Example

Let's look at an example to understand how accounts receivable is calculated:

Suppose a company has sold goods worth $10,000 on credit and has received $7,500 in payments from customers. The accounts receivable would be calculated as follows:

Accounts Receivable = $10,000 - $7,500 = $2,500

This means the company has $2,500 owed to it by customers for goods or services delivered but not yet paid for.

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 the company by customers	Money owed by the company to suppliers
Represents short-term assets	Represents short-term liabilities
Improves cash flow when collected	Reduces cash flow when paid
Tracked in the assets section of the balance sheet	Tracked in the liabilities section of the balance sheet

Understanding the difference between these two accounts helps businesses manage their cash flow more effectively and make informed financial decisions.

FAQ

What is the difference between accounts receivable and revenue?

Revenue is the total income generated from sales before any deductions, while accounts receivable represents the portion of that revenue that has not yet been collected in cash.

How often should accounts receivable be calculated?

Accounts receivable should be calculated regularly, typically on a monthly basis, to monitor cash flow and collection efficiency.

What factors can affect accounts receivable?

Several factors can affect accounts receivable, including credit policies, payment terms, economic conditions, and collection processes.