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Accounts Receivable Ratios

By: Peter Emerson
Submitted: 2007-01-17 15:15:01
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Accounts receivable is one of a series of accounting transactions dealing with the billing of customers who owe money to a person, company or organization for goods and services. This is typically done by creating an invoice, then mailing or delivering it to each customer.

An accounting measure is used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. The formula that is most used is ?accounts receivable turnover equals the net credit sales over the average accounts receivable.?

Net sales are defined as the amount a seller receives from the buyer after costs associated with the sale are deducted. This amount is calculated by subtracting the following items from gross sales: merchandise returned for credit, allowances for damaged or missing goods, freight out, and any cash discounts allowed. Average receivables is defined as a company's accounts receivable (money owed to the company) minus bad debts. If a company estimates that 3% of its sales are never going to be paid, then net receivables equals 97% (100% - 3%) of the accounts receivable.

Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales. By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis, or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.

Accounts Receivable Factoring provides detailed information on accounts receivable factoring, accounts receivable collection, accounts receivable factoring companies, accounts receivable financing and more. Accounts Receivable Factoring is affiliated with Accounts Receivable Collection.

Article source: Expert Articles

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