November 6, 2012

Accounts Receivable and Turnover (A/R)

Accounts Receivables or A/R =  someone owes you money

Example:  If you have a $500 sale purchased on credit, your A/R = $500.   If they don’t pay, you must write off the debt to the provision for loan losses account.

A/R Net = Accounts Receivables – Provision for loan losses

Another concept to know is Receivables Turnover.   Receivables Turnover = how often (or how fast) the customer is paying during this period (typically a year).

Receivables Turnover = (Total of all credit sales) / (A/R).

Example:  $10,000 / $1,000 = 10 times

So, if your annual sales = $10,000 and A/R turnover = 10 times during the year = Your average A/R balance = $1000

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