Average accounts receivables are the average amount of trade receivables on hand during a reporting period. Average accounts receivable formula is found by adding extra data points of Accounts receivable (AR) balance and dividing by the number of all data points.
Explanation:
This term is closely tied to Accounts Receivable balance, indicating is the total amount of money that customers owe to a business from sales on account. It is also a company’s asset, representing an amount of cash to be collected at a future date.
Average accounts receivable is a vital part of the calculation of receivables turnover – an accounting measure used to quantify the effectiveness of a business in collecting its receivables or money owed by a customer. So, it is a necessary step to be undertaken while measuring or presenting the performance of a company to investors.
There are different ways to count the average receivables ratio, and the easiest is adding several data points to AR balance and dividing by the number of all data points. The simplicity of this method comes from the fact that the data needed for the calculation is available in the year-end balance sheets of a company.
The problem, though, is that if a business depends on seasons, it will not draw a real picture of its balance throughout a whole year. Another method requires balances from the past 13 months, the data is the same way available, but instead of two data points, the formula includes 13. It allows the ratio to reflect seasonal and even year-to-year fluctuations of the balance, therefore, providing more valid information on the company’s effectiveness.