What Part Does the Receivable Turnover Play in Accounting?
Accounts receivable is the business account that holds the money that the business is due through sales on credit, but has not actually been paid yet. Businesses design their sales techniques so that funds only stay in accounts receivable for a certain amount of time, such as 30 to 60 days. However, this limit is not always met and may be a source of continual strategizing on the part of the company. The accounting department is closely involved in managing accounts receivable and analyzing its turnover data.
Other People Are Reading
-
The Ratio
-
The receivables turnover ratio is created by taking the credit sales of a particular period, usually annual credit sales for a good measurement, and dividing them by the average accounts receivable amount found in the account itself. This allows accountants to see how many times accounts receivable have been collected within the period and match this time to how often the business expected to collect accounts receivable and turn it into realized cash.
Dividing Sales Accounts
-
Accountants must begin the receivable turnover process by dividing sales. This means that as sales are recorded, separate entries must be made for all sales on credit that go into accounts receivable, and all sales that are paid on the spot. This allows the accountant to quickly access only relevant sales numbers when it comes time to create the ratio.
-
Moving Cash
-
A major part of managing accounts receivable is making sure that cash is moved to the proper accounts when necessary. Money in accounts receivable cannot be counted as revenue cash until it is actually paid. When this occurs, accountants need to make sure the money is taken from accounts receivable and moved into a cash revenue account. Not only does this make the receivable turnover ratio possible, but it is also necessary for proper taxation.
Analysis for Improving Collection Times
-
If a company finds that the receivable turnover ratio is too low, accountants also help analyze the accounts for potential solutions. They find out what is needed to improve collections by a certain amount and how changes to the sales model of the business would affect the ratio by placing money in different accounts instead.
-
