Accounts receivable turnover ratio and types of calculation

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According to numerous sources, the concept is characterized by the sum of accounts receivable debts, which some business entities are required to pay the other economic entities on the basis of their economic interactions.As a rule, these debts arise from sales on credit.

in accounting for accounts receivable refers to property rights, as an object of regulation of civil law.The content of these rights is set out in Art.128 of the Civil Code, and includes things, money, services and securities information, objects of intellectual property, other assets and intangible benefits.As a result of such an interpretation of receivables serves as part of the assets of the enterprise, and the right to receive, respectively, is a property right.

should be noted that in economic practice, not a single economic entity can not do without it, because the creation of a receivable due to objective circumstances, namely:

  • for the debtor - a free access to additional working capital;
  • to the lender - it is the opportunity to actively expand the market.

Formation of receivables contributes to a situation in which the time of the change in ownership coincides with the time of payment.

One of the main factors of success of the enterprise or company advocates an increase in receivables compared with the value of accounts payable.In its simplest form, the receivables should be taken in three forms of its manifestation:

  • first, the way it acts and a resource that can be used to repay accounts payable;
  • secondly, is part of the production, which is already sold to consumers, but have not yet received payment for shipped goods;
  • thirdly, it is part of current assets, which are formed from its own sources of the enterprise or organization.

That's why the most important indicator of the receivables turnover ratio in favor of accounts receivable, referred to as «RT».At its simplest, classical form is determined by dividing the index of turnover of the company for the average value of the receivables.Calculated in this way accounts receivable turnover ratio shows the efficiency of the company or companies on demand of payment for products shipped to customers.Reducing the value of the coefficient indicates an increase in the number of insolvent clients, as well as the emergence of other problems with the sale of these products.This is a very alarming signal for the company, since the lower turnover, the demand for its working capital will be higher.

There are several ways that may affect the turnover ratio of receivables.For example, widespread use was a way to expressing the turnover as the average number of days it takes to collect payments, it is called the period of collection of receivables (CP) and is calculated as:

CP = (RT / N) x 365,

where N- sales and 365 - the number of days in a year.

If another study period, the number 365, respectively, varies by the number of days of the test period.

addition, the turnover ratio of receivables to determine the trends of its values.For example, increasing it at a constant speed circulation inevitably leads to an increase in return on capital invested in the production and accordingly, vice versa.