Accounts Receivables Turnover Ratio - Meaning, Formula, Calculation & Interpretations

This tutorial explains how the accounts receivable turnover ratio works, including its meaning, formula, calculations, and interpretation. Furthermore, using the Colgate Case Study, we will demonstrate how to calculate this ratio in Excel.

What is Accounts Receivables Turnover Ratio?
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The accounts receivable turnover ratio assesses a company's ability to collect credit from customers. In simple terms, it indicates how many times a company's average accounts receivables are collected and converted into cash over a specific time period, which is often a year.

Formula
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Accounts Receivable Turnover Ratio Formula = Net Credit Sales / Average Accounts Receivables

Interpretation of Accounts Receivables Turnover Ratio
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- A higher ratio indicates that the company is collecting cash more frequently and/or that its debtors are of good quality. It could also indicate that the company does much of its business in cash or has a stringent credit policy.
- A lower ratio could indicate that the company is inefficient in collecting debts, has a liberal credit policy, or has poor debtor quality.

Connect with us!
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[sakshidharwa]

Absolutely awesome.i have wasted 2-3 hrs just trying to understand the logic behing these ratios and formula and afted watching this i have finally got clear understanding on how these formulas are made and what they interpret.now i dont have to memorise the formula.
Thanks a lot

[narayanbista]

This video was very step by step to learn this ratio in detailed manner thank you for such an amazing video.

[poojaborkar]

Best video and great step by step explanation. Excellent Work.

[ChefExecutiveOfficer]

If its collecting 1600 worth of receivables 5 times, it means, it has already collected the 8000 given as credit.
Then why receivables seen as 1600, shouldnt it be zero. Pls clear my doubt

[KiranJames-nr]

Hi! Credit Sales means product or service sold on credit basis wherein you are yet to receive the amount. Account receivables means amount not received but yet to be received. So in your example when you show 1200 as receivables, does it mean the amount has already been received?

[jasonfairbanks]

Excellent explanation. Best I’ve seen! Thank you!

[kesifeldman]

beautifully explained the meaning of Accounts Receivables Turnover Ratio

[kyafawi]

very useful.

I have a question regarding the construction industry:
shall we include the retention amount which will be paid at the end of the contract in the receivable and deduct the advance paid by the client to get the net account receivable ?
what about the unbilled revenue which is included in the revenue at the end of the Year based on the percentage of completion method?

[jyotikrupashankarsingh]

Very Interesting! Thanks for the Video.

[kavishaggarwal]

Sir can you please make video for class 11 of accounts chapter cash book . Hope you will help me to understand cash book

[raghavchoudhary]

Sir please explain me one thing related to the numerator of quick ratio: my doubt is you had previously said about current ratio that if a company has the ratio less than 1 it's a negative one. So in this ratio, numerator is basically getting reduced(means the inventory is now not getting considered), so why again during analysis we take 1 to compare whether the company is good or bad. Because the numerator is basically reduced and now to get a better comparison we should take less than 1, like instead of 1 take as 0.8 or something...

[MunenderChauhan-bg]

Hi, If opening balance and closing balance are 0 or missing any one of them then how to calculate average debtors. Please help.

[AmanAgarwal-DMDM]

Sir could you please also tell us in which industry we can expect a higher account receivables turnover ratio and in which industry we can expect the lower ratio? and similarly could you please connect these ratios which different industries?

[ksvirk]

1600 is not already collected, its pending collection thats why its receivable, 6400 collected leaving 1600 still pending…i m bit confused with your explanation because of this.