How to Calculate The Ending Balance of Accounts Receivable

Accounts receivable is a key financial metric that tracks money owed to a company by its customers. Calculating the ending balance helps businesses understand their cash flow and financial health. This guide explains how to determine the ending balance of accounts receivable with a step-by-step approach and an interactive calculator.

What is Accounts Receivable?

Accounts receivable (AR) represents the money a company expects to receive from customers for goods or services provided on credit. It's an important component of a company's balance sheet and is calculated as the difference between the total sales on credit and the cash collected from those sales.

The ending balance of accounts receivable is particularly useful for financial analysis because it shows how much money a company has yet to collect from its customers. This information helps businesses make informed decisions about inventory management, credit policies, and cash flow planning.

How to Calculate Ending Balance of Accounts Receivable

Calculating the ending balance of accounts receivable involves several steps. Here's the standard approach:

Formula

Ending Balance of Accounts Receivable = Beginning Balance + New Sales on Credit - Cash Collected from Customers

Step-by-Step Calculation

Determine the beginning balance of accounts receivable from the previous period's financial statements.
Add the new sales made on credit during the current period.
Subtract the cash collected from customers during the current period.
The result is the ending balance of accounts receivable.

Note: This calculation assumes no write-offs or bad debts. In practice, businesses may need to account for uncollectible accounts separately.

Example Calculation

Let's walk through an example to illustrate how to calculate the ending balance of accounts receivable.

Description	Amount ($)
Beginning Balance of Accounts Receivable	$10,000
New Sales on Credit	$5,000
Cash Collected from Customers	$7,000
Ending Balance of Accounts Receivable	$8,000

In this example, the ending balance is calculated as follows:

$10,000 (beginning balance) + $5,000 (new sales) - $7,000 (cash collected) = $8,000

Key Concepts

Accounts Receivable Turnover

Accounts receivable turnover measures how efficiently a company collects payments from its customers. It's calculated by dividing net credit sales by the average accounts receivable balance.

Days Sales Outstanding (DSO)

Days sales outstanding is another key metric that shows how long it takes for a company to collect payment after making a sale. It's calculated by dividing the average accounts receivable by net credit sales, then multiplying by 365.

Cash Conversion Cycle

The cash conversion cycle combines accounts receivable, inventory, and accounts payable to show how long it takes for a company to convert its investments in inventory into cash from customers.

FAQ

What is the difference between accounts receivable and accounts payable?: Accounts receivable represents money owed to a company by its customers, while accounts payable represents money a company owes to its suppliers.
How often should I calculate accounts receivable?: Accounts receivable should be calculated regularly, typically monthly or quarterly, to monitor cash flow and financial health.
What factors can affect accounts receivable?: Several factors can affect accounts receivable, including credit policies, customer payment habits, economic conditions, and industry trends.
How can I improve my accounts receivable collection?: Improving accounts receivable collection can involve implementing stricter credit policies, offering payment incentives, improving invoicing processes, and using collection software.