# Accounts Receivable Turnover Ratio

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,
$$Avg.AccountsReceivable=$$$$\frac { Opening\quad Debtors+Closing\quad Debtors }{ 2 }$$

## 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 