Average Accounts Receivable
Average accounts receivable is a financial metric used to determine the average amount of outstanding receivables a company has during a specific period. It is calculated by adding the beginning accounts receivable balance and the ending accounts receivable balance, then dividing the sum by two. This metric helps businesses to track their efficiency in collecting payments from customers and managing their credit terms.
Formula for calculating average accounts receivable:
\(\text{Average Accounts Receivable} = \frac{\text{Beginning Accounts Receivable + Ending Accounts Receivable}}{2} \)
Example of Average Accounts Receivable
Let’s say a company has the following accounts receivable balances:
- Beginning accounts receivable at the start of the year: $10,000
- Ending accounts receivable at the end of the year: $15,000
To calculate the average accounts receivable for the year, we can use the formula:
\(\text{Average Accounts Receivable} = \frac{\text{Beginning Accounts Receivable + Ending Accounts Receivable}}{2} \)
Plugging in the numbers:
\(\text{Average Accounts Receivable} = \frac{10,000 + 15,000}{2} \)
\(\text{Average Accounts Receivable} = \frac{25,000}{2} \)
\(\text{Average Accounts Receivable} = 12,500 \)
So, the average accounts receivable for the company during the year is $12,500. This figure provides insight into the company’s effectiveness in managing its credit sales and collecting payments from customers.
