This figure should include the total credit sales, minus any returns or allowances. The first part of the accounts receivable turnover formula calls for net credit sales, or in other words, all of the sales for the year that were made on credit (as opposed to cash). Note: When any information about credit sales, opening and closing balances of trade debtors is not available then the ratio can be calculated by dividing total sales by closing balances of trade debtorĭebtor Turnover Ratio = Total Sales / Trade Debtors Steps to calculate accounts receivables turnover ratio Step 1: Determine your net credit sales Trade debtor includes sundry debtors and bill’s receivables and the formula to determine average trade debtors is given below:Īverage trade debtors ( Opening + Closing balances / 2 ) Also termed as a debtor, bills receivables or account receivable. Average trade debtorsĪ trade debtor is a person from whom amounts are due for goods sold or services rendered or in respect of contractual obligations. The concept of net credit sales is an indicator of the total amount of credit that a company is granting to its customers. The terms gross credit sales and net credit sales are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts. The aggregate amount of sales or services rendered by an enterprise to its customers on credit. The receivables turnover ratio is determined by dividing the net credit sales by average debtors.ĭebtor Turnover Ratio = Net Credit Sales / Average Trade Debtors Components of accounts receivables turnover ratio Net credit sales Accounts receivable turnover ratio formula It also helps interpret the efficiency in using a company's assets in the most optimum way. This is also referred to as the efficiency ratio that measures the company's ability to collect revenue. This indicates the number of times average debtors have been converted into cash during a year. What is accounts receivables turnover ratio?Īccounts Receivables Turnover ratio is also known as debtors turnover ratio. In this article, we will discuss on accounts receivable turnover ratio. The following ratios can be calculated to judge the effectiveness of the asset's use. Turnover ratios are also referred to as activity ratios or efficiency ratios with which a firm manages its current assets. In view of the requirement of ratios to be reported in a financial report, the ratios are classified into the following broad categories: It involves comparison for a meaningful interpretation of the financial statements. Ratio analysis refers to the systematic use of ratios to interpret the financial statements in terms of the operating performance and financial position of a firm. Limitations of the Accounts Receivables Turnover Ratio.What are higher or lower accounts receivable turnover?.Interpretation of Accounts Receivable Turnover Ratio.Accounts receivables turnover ratio example.Steps to calculate accounts receivables turnover ratio.Components of accounts receivables turnover ratio.Accounts Receivable Turnover Ratio Formula.What is accounts receivables turnover ratio.

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