How to Calculate Accounts Receivable Formula: A Comprehensive Guide
Accounts receivable are an essential component of a company’s financial health, representing the amount of money owed to the business by its customers for goods or services provided on credit. Accurately calculating accounts receivable is crucial for financial planning, budgeting, and ensuring the smooth operation of a business. In this article, we will explore the accounts receivable formula and provide a step-by-step guide on how to calculate it effectively.
Understanding the Accounts Receivable Formula
The accounts receivable formula is a straightforward calculation that can help businesses track and manage their receivables. The formula is as follows:
Accounts Receivable = Total Sales on Credit – Total Cash Received
This formula consists of two main components:
1. Total Sales on Credit: This represents the total amount of sales made to customers on a credit basis during a specific period. It includes all the sales transactions where the payment is yet to be received.
2. Total Cash Received: This refers to the total amount of cash collected from customers during the same period. It excludes any payments made on credit, as these are already accounted for in the total sales on credit.
Step-by-Step Guide to Calculate Accounts Receivable
To calculate the accounts receivable for a specific period, follow these steps:
1. Gather the necessary data: Collect the sales records for the period you want to calculate the accounts receivable for. This includes all the sales transactions made on credit.
2. Calculate the total sales on credit: Add up all the sales transactions made on credit during the specified period. This figure will be used as the numerator in the accounts receivable formula.
3. Calculate the total cash received: Determine the total amount of cash collected from customers during the same period. This figure will be subtracted from the total sales on credit in the formula.
4. Apply the accounts receivable formula: Subtract the total cash received from the total sales on credit to obtain the accounts receivable figure.
Example:
Let’s say a company has made $100,000 in sales on credit during a month and collected $80,000 in cash from those sales. To calculate the accounts receivable, we would use the following formula:
Accounts Receivable = $100,000 (Total Sales on Credit) – $80,000 (Total Cash Received)
Accounts Receivable = $20,000
In this example, the company has $20,000 in accounts receivable.
Conclusion
Calculating the accounts receivable formula is a vital task for businesses to manage their financial health effectively. By following the steps outlined in this article, you can ensure accurate calculations and maintain a clear understanding of your company’s receivables. Regularly monitoring accounts receivable can help you identify potential issues, such as late payments or slow collections, and take appropriate actions to improve your cash flow and financial stability.
