How to Calculate Ending 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 ending accounts receivable helps businesses understand their cash flow position and financial health.

What is Accounts Receivable?

Accounts receivable (AR) represents the money owed to your business by customers for goods or services provided but not yet paid. It's a critical component of working capital that helps businesses manage cash flow and financial performance.

Tracking accounts receivable is essential for several reasons:

Provides insight into how quickly customers pay their bills
Helps forecast cash flow and liquidity needs
Assists in financial reporting and analysis
Identifies potential collection issues

The accounts receivable balance changes throughout the accounting period as new sales are made and existing receivables are collected.

How to Calculate Ending Accounts Receivable

Calculating ending accounts receivable involves determining the balance at the end of an accounting period. This is typically done by:

Starting with the beginning balance of accounts receivable
Adding new sales (invoices issued) during the period
Subtracting collections (payments received) during the period

The result is the ending accounts receivable balance, which represents the amount owed to your business at the end of the period.

Note: Accounts receivable can also be calculated using the accounts receivable turnover ratio, but the basic calculation method described here is most commonly used for periodic reporting.

The Formula

The basic formula for calculating ending accounts receivable is:

Ending Accounts Receivable = Beginning Accounts Receivable + New Sales - Collections

Where:

Beginning Accounts Receivable - The balance at the start of the period
New Sales - Invoices issued during the period
Collections - Payments received during the period

This formula provides a straightforward way to track the accounts receivable balance over time, which is essential for financial analysis and reporting.

Worked Example

Let's walk through a practical example to illustrate how to calculate ending accounts receivable.

Example Scenario

Assume the following figures for a company's accounts receivable:

Item	Amount ($)
Beginning Accounts Receivable	$50,000
New Sales (Invoices Issued)	$80,000
Collections (Payments Received)	$60,000

Calculation Steps

Start with the beginning balance: $50,000
Add new sales: $50,000 + $80,000 = $130,000
Subtract collections: $130,000 - $60,000 = $70,000

The ending accounts receivable balance is $70,000.

In this example, the company's accounts receivable increased from $50,000 to $70,000 over the period, indicating that more sales were made than were collected.

FAQ

What is the difference between accounts receivable and accounts payable?: Accounts receivable represents money owed to your business by customers, while accounts payable represents money your business owes to suppliers or vendors.
How often should accounts receivable be calculated?: Accounts receivable should be calculated at the end of each accounting period, typically monthly or quarterly, depending on your business's reporting needs.
What factors can affect accounts receivable?: Several factors can influence accounts receivable, including customer payment terms, industry trends, economic conditions, and your company's credit policies.
How can I improve my accounts receivable management?: Improving accounts receivable management involves implementing effective credit policies, offering flexible payment terms, using automated collection systems, and maintaining good relationships with customers.