Accounts receivable turnover ratio ( also known as debtors turnover ratio) shows the effectiveness of the company’s credit control system.
Much like inventory turnover ratio, accounts receivable turnover ratio shows how many times in a year debtors are given credit and they fully repay it. It is calculated as follows:
Formula of Accounts receivable turnover ratio
Example
The Fine company sells goods on credit. The following data belongs to most recent period:
- Net sales: $4,800,000
- Accounts receivable at the beginning of the year: $1,000,000
- Accounts receivable at the end of the year: 800,000
Compute accounts receivable turnover ratio of the Fine Trading Company.
Solution:
Accounts receivable turnover ratio = Sales/Average accounts receivable
= $480,000/$900,000*
*(1,000,000 + 800,000)/2
= 5.33 times (A rather slow rate of debtors turnover for a trading company).
