Trade Receivables Turnover Ratio

Trade Receivables Turnover Ratio, also known as the accounts receivable turnover ratio or debtors turnover ratio, is an important ratio in accounting.

It is used to determine the efficiency by which the business is managing the credit that is being extended to its customers and evaluate how long does it take for the business to collect the outstanding debt in the accounting period.

A high receivables turnover ratio indicates that the collection mechanism of the business is very efficient and the business also has a high proportion of customers who are making their payments quickly in order to write off the debts.

A low receivables, on the other hand, indicates that the business lacks a clear collection mechanism, no clear credit policy is defined along with customers who are not financially viable and are defaulting in their payments.

We will be discussing the formula for calculating the Accounts receivable turnover ratio in the following lines.

Trade Receivables Turnover Ratio Calculation

The formula for Trade receivables turnover ratio or Accounts receivable turnover ratio is represented as follows

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Net credit sales refer to the revenue that is generated from the credit sales done to customers minus any returns during the period from the customers.

Average accounts receivable can be calculated by adding the value of accounts beginning and ending account receivable of that period and dividing by two.

Let us understand the calculation of accounts receivable turnover ratio with a solved example

Solved Example

Ajay Industries Ltd has a beginning account receivable balance of ₹250,000 and the ending accounts receivable balance of ₹320,000. The total credit sales for the year was ₹500,000, while returns amounted to ₹30,000. Find the accounts receivable turnover ratio.

Answer:

We know that

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Now,

Net Credit Sales = Total Credit Sales – Returns

= 500,000 – 30,000

= 470,000

Average Account Receivable = (Beginning Account Receivable + Ending Account Receivable) / 2

Therefore,

Average Account Receivable = (250,000 + 320,000) / 2

= 285,000

Now, Accounts Receivable Turnover Ratio = 470,000 / 285,000

= 1.649 or 1.65

This concludes our article on the topic of Trade Receivables Turnover Ratio, which is an important topic in Class 12 Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

Leave a Comment

Your Mobile number and Email id will not be published. Required fields are marked *

*

*