# Receivables turnover ratio

Receivables turnover ratio (also known as debtors turnover ratio) is computed by dividing the net credit sales during a period by average receivables.

Accounts receivable turnover ratio simply measures how many times the receivables are collected during a particular period. It is a helpful tool to evaluate the liquidity of receivables.

## Formula:

Two components of the formula are “net credit sales” and “average trade accounts receivable”. It is clearly mentioned in the formula that the numerator should include only credit sales. But in examination questions, this information may not be given. In that case, the total sales should be used as numerator assuming all the sales are made on credit.

Average receivables are equal to opening receivables (including notes receivables) plus closing receivables (including notes receivables) divided by two. But sometimes opening receivables may not be given in the examination questions. In that case closing balance of receivables should be used as denominator.

## Example:

The data of a trading company is given below:

 Total sales \$5,500,000 Cash sales \$2,500,000 Accounts receivables – opening \$400,000 Accounts receivables – closing \$250,000 Notes receivables – opening \$150,000 Notes receivables – closing \$200,000

Required: How may times (on average) company collects accounts receivables?

Hint: Compute accounts receivable/debtors turnover ratio.

### Solution:

= \$3,000,000* / \$500,000**

6 times

On average, the company collects its receivables 6 times a year.

* Credit sales:
\$5,500,000 – \$2,500,000 = \$3,000,000