Accounts Receivable Turnover Ratio is a type of Turnover Ratio that determines the efficiency with which a business is using its assets. In other words, this ration tells how good a company is in collecting the receivable or money owed to it. Accounts Receivable Turnover Ratio is also known as Trade Receivable Turnover Ratio or Debtor’s Turnover Ratio.
$$Accounts\quad Receivable\quad Turnover\quad Ratio= $$$$\frac { Net\quad Credit\quad Sales\quad Average }{ Accounts\quad Receivable } $$
Net Credit Sales = Total Sales During the Period (Excluding Sales Returns, Sales Allowances, and Sales for which payment is received in Cash)Where,
$$Avg.AccountsReceivable=$$$$\frac { Opening\quad Debtors+Closing\quad Debtors }{ 2 } $$
⇨ (2000000 – 200000– 500000)
Net Credit Sales = Rs. 1300000.00
$$Avg.AccountsReceivable=$$$$\frac { Opening\quad Debtors+Closing\quad Debtors }{ 2 } $$ Average Accounts Receivable = (250000 + 250000) / 2
⇨ Rs. 300000.00
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
⇨ 1300000 / 300000 = 4.33
$$Accounts\quad Receivable\quad Turnover\quad Ratio= $$$$\frac { Net\quad Credit\quad Sales\quad Average }{ Accounts\quad Receivable } $$
Net Credit Sales = Total Sales During the Period (Excluding Sales Returns, Sales Allowances, and Sales for which payment is received in Cash)Where,
$$Avg.AccountsReceivable=$$$$\frac { Opening\quad Debtors+Closing\quad Debtors }{ 2 } $$
Significance and Interpretation
Accounts Receivable Turnover Ratio tells the number of times the receivables are turned over and converted into cash over a period.- High Accounts Receivable Turnover Ratio indicates the efficiency of a company is receiving its debts over a period, it is desirable to have a high value of this ratio.
- However, it should be noted that a High Accounts Receivable Turnover Ratio may also imply that a company may be following a Conservative Credit Policy i.e. it is giving credit strictly to Credit Worthy customers.
- Low Accounts Receivable Turnover Ratio indicates that the company is not able to collect its Receivables properly or the company is not following a good credit policy. Low values of this ratio are not desirable/healthy for a company.
- It must be noted that while comparing two companies on the grounds of Accounts Receivable Turnover Ratio, they should be of the same industry.
Examples
Example 1:
Use the following data of ABC Ltd, to calculate its Accounts Receivable Turnover Ratio.- Total Sales during FY = Rs. 2000000.00
- Sales return during FY = 10% of Total Sales
- Sales in Cash = 25% of Total Sales
- Accounts receivable at the Beginning of FY = Rs 250000.00
- Accounts receivable at the End of FY = Rs 350000.00
Solution:
Net Credit Sales = Total Sales – Sales Returns – Sales in Cash⇨ (2000000 – 200000– 500000)
Net Credit Sales = Rs. 1300000.00
$$Avg.AccountsReceivable=$$$$\frac { Opening\quad Debtors+Closing\quad Debtors }{ 2 } $$ Average Accounts Receivable = (250000 + 250000) / 2
⇨ Rs. 300000.00
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
⇨ 1300000 / 300000 = 4.33
Hence, Accounts Receivable Turnover Ratio = 4.33
