How to Calculate Ending Accounts Receivable
Calculating the ending accounts receivable is a crucial step in financial management for any business. It helps in assessing the company’s liquidity and understanding the amount of money that is yet to be collected from customers. This article will guide you through the process of calculating the ending accounts receivable, providing you with a clear understanding of the steps involved.
Understanding Accounts Receivable
Before diving into the calculation, it’s essential to have a clear understanding of what accounts receivable is. Accounts receivable represent the amount of money that a company is owed by its customers for goods or services provided on credit. It is a current asset on the balance sheet and is typically listed under the “Assets” section.
Steps to Calculate Ending Accounts Receivable
1. Start with the Opening Balance: Begin by identifying the opening balance of accounts receivable. This is the amount from the previous period, which can be found in the company’s financial statements.
2. Add Sales on Credit: Next, add the total sales made on credit during the period. This includes all the sales transactions where the payment was not received immediately, and the customer was given a credit term.
3. Subtract Cash Received: Subtract the total amount of cash received from customers during the period. This includes payments made by customers for both new sales and payments against existing receivables.
4. Adjust for Write-offs: If there were any bad debts or write-offs during the period, subtract these amounts from the total. Bad debts are amounts that are deemed uncollectible and are written off as a loss.
5. Calculate the Ending Balance: Finally, sum up the opening balance, credit sales, and subtract the cash received and write-offs. The resulting figure is the ending accounts receivable balance.
Example Calculation
Let’s say the opening balance of accounts receivable is $50,000. During the period, the company made $100,000 in credit sales and received $70,000 in cash. Additionally, there were $5,000 in bad debts written off. The calculation would be as follows:
Opening Balance: $50,000
Credit Sales: $100,000
Cash Received: -$70,000
Write-offs: -$5,000
Ending Accounts Receivable: $50,000 + $100,000 – $70,000 – $5,000 = $75,000
Conclusion
Calculating the ending accounts receivable is an essential task for businesses to manage their cash flow and financial health. By following the steps outlined in this article, you can accurately determine the amount of money that is still owed to your company and take appropriate actions to collect it. Remember to regularly review and analyze your accounts receivable to identify any potential issues and improve your cash flow management.
