How to Calculate Cash Collected From Accounts Receivable

Accounts receivable is the money owed to a business by its customers for goods or services delivered but not yet paid for. Calculating cash collected from accounts receivable helps businesses track their cash flow and financial health. This guide explains the process step-by-step with a built-in calculator.

What is Accounts Receivable?

Accounts receivable (AR) represents the balance of money owed by customers to a business for goods or services provided. It's a key component of a company's working capital and is recorded on the balance sheet under current assets.

When a business sells goods or services on credit terms, the sale is recorded as revenue, but the cash isn't received immediately. Instead, it's recorded as accounts receivable until payment is made. The accounts receivable account decreases when customers pay their invoices, and increases when new sales are made on credit.

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

How to Calculate Cash Collected from Accounts Receivable

Calculating cash collected from accounts receivable involves determining how much of the receivable balance has been paid by customers. This helps businesses track their cash flow and financial performance.

Steps to Calculate

Identify the total accounts receivable balance at the beginning of the period.
Determine the total accounts receivable balance at the end of the period.
Calculate the change in accounts receivable during the period.
Determine the cash collected from accounts receivable by subtracting the change in receivables from the beginning balance.

The formula for calculating cash collected from accounts receivable is:

Cash Collected = Beginning Accounts Receivable - Ending Accounts Receivable + New Sales on Credit

Where:

Beginning Accounts Receivable = The balance at the start of the period
Ending Accounts Receivable = The balance at the end of the period
New Sales on Credit = Any new sales made on credit during the period

Formula

The formula for calculating cash collected from accounts receivable is:

Cash Collected = Beginning Accounts Receivable - Ending Accounts Receivable + New Sales on Credit

This formula shows that cash collected from accounts receivable is equal to the decrease in the receivable balance plus any new sales made on credit during the period.

Key Assumptions

The accounts receivable balance is accurate and up-to-date.
All sales are recorded correctly in the accounts receivable account.
There are no errors in the accounting records.

Example Calculation

Let's look at an example to illustrate how to calculate cash collected from accounts receivable.

Scenario

A company has the following accounts receivable information for the month of June:

Description	Amount ($)
Beginning Accounts Receivable	$50,000
Ending Accounts Receivable	$30,000
New Sales on Credit	$20,000

Calculation

Using the formula:

Cash Collected = $50,000 - $30,000 + $20,000 = $40,000

This means the company collected $40,000 in cash from its accounts receivable during June.

FAQ

What is the difference between accounts receivable and cash collected?: Accounts receivable is the balance of money owed by customers, while cash collected is the actual payment received from those customers.
How often should I calculate cash collected from accounts receivable?: It's recommended to calculate this on a monthly or quarterly basis, depending on your business needs and accounting practices.
What factors can affect the accuracy of this calculation?: Inaccurate accounting records, late payments, and errors in recording sales can all affect the accuracy of this calculation.
How does cash collected from accounts receivable impact my cash flow?: Cash collected from accounts receivable is a key component of your operating cash flow, showing how well you're converting receivables into cash.
What should I do if my accounts receivable balance is high?: A high accounts receivable balance may indicate slow payment from customers. You can improve this by offering payment discounts, negotiating payment terms, or improving your credit collection processes.