# Calculating Average Accounts Receivable

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Credit Sales is an income statement account covering a period of time—such as one year. Accounts Receivable is a balance sheet account representing an instant or point in time. Since it could be misleading to divide the Credit Sales for the entire year by the Accounts Receivable balance at an instant at the end of just one day, one should strive to determine the average balance of Accounts Receivable during the entire year. In other words, the goal is to calculate an average balance in the Accounts Receivable account for the same one-year period as the Credit Sales.

Often the average balance in the Accounts Receivable account for a year is calculated by using the balances on just two days: the beginning of the year balance and the end of the year balance. This could also be misleading because companies' accounting years often end at their slowest time of the year and the balances in Accounts Receivable at that time will be very low and not indicative of the year. Expressed another way, if the company has its peak business season in the middle of its accounting year, using the balances in Accounts Receivable on two days outside of the peak period may be just as misleading as selecting one day at the end of the accounting year.

In order to obtain an average that is more representative of the entire year, some companies use the Accounts Receivable account balances at the end of 13 months and others compute the simple average of the 12 monthly averages.

The following illustration shows three computations of the average of the balances in Accounts Receivable for a company with a summer busy season.

 Date Balancesat 2 points Balancesat 13 points Monthly Averages December 31, 2010 \$ 40,000 \$ 40,000 January 31, 2011 60,000 \$ 50,000 February 28, 2011 70,000 65,000 March 31, 2011 80,000 75,000 April 30, 2011 100,000 90,000 May 31, 2011 150,000 125,000 June 30, 2011 250,000 200,000 July 31, 2011 300,000 275,000 August 31, 2011 200,000 250,000 September 30, 2011 130,000 165,000 October 31, 2011 60,000 95,000 November 30, 2011 50,000 55,000 December 31, 2011 60,000 60,000 55,000 Total \$ 100,000 \$ 1,550,000 \$ 1,500,000 No. of points 2 13 12 AVERAGE \$ 50,000 \$ 119,231 \$ 125,000

As you can see, using only the beginning and end of year balances (December 31, 2010 and the December 31, 2011 balances) in Accounts Receivable results in an average balance of \$50,000.

Using 13 points throughout the year results in an average balance in Accounts Receivable of \$119,231.

Using the average of the 12 monthly averages results in \$125,000.

If you are comparing your company's financial ratios to another company's ratios or to the industry averages, it is important to keep in mind that the financial ratios can vary due to the calculations of the averages.

Because the material covered here is considered an introduction to this topic, many complexities have been omitted. You should always consult with an accounting professional for assistance with your own specific circumstances.

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