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Basic Accounting 101- Asset Turnover Ratio
Accounting 101
Many companies sell goods or services on account. This means that a customer purchases goods or services from a company but does not pay for them at the time of purchase. Payment is usually due within a short period of time, ranging from a few days to a year. These transactions appear on the balance sheet as accounts receivable.
It is important to collect accounts receivables as quickly as possible. The longer it takes to collect outstanding receivables,[link widoczny dla zalogowanych], the more likely it is that the account may never be paid. Receivables also tie up cash, which means there is less money available for use in operations, paying dividends, or for other investing activities. The accounts receivable turnover ratio measures how many times, on average, accounts receivables are collected in cash during the year.
This ratio is computed by dividing net sales by the average net accounts receivable. Ideally, only the sales on credit should be used in the numerator,[link widoczny dla zalogowanych], but many companies only report net sales, therefore,[link widoczny dla zalogowanych],[link widoczny dla zalogowanych], it is acceptable to use net sales.
The total receivables due can vary considerably from one period to the next. Sales on account will increase the accounts receivables balance, while payments from customers will decrease the accounts receivables balance. The volume of sales has a significant impact on accounts receivables. An increase in sales volume usually results in an increase in accounts receivables.
Accounts Receivable Turnover