Definition of Accounts Receivable Collection Period
The accounts receivable collection period is similar to the days sales outstanding or the days sales in accounts receivable.
The accounts receivable collection period is calculated as follows:
- Divide company's net credit sales for the year by 360 or 365 days = average credit sales per day
- Divide the average balance in Accounts Receivable during the year by #1
An alternative calculation is to use the accounts receivable turnover ratio.
Example of Accounts Receivable Collection Period
Assume a corporation had net credit sales of $360,000 during the past year and its accounts receivable balance was on average $40,000. The average credit sales per day were approximately $1,000 per day ($360,000 of annual credit sales divided by 360 or 365 days per year). The average accounts receivable balance of $40,000 divided by $1,000 of credit sales per day = 40 days.
Calculating the accounts receivable collection period using the accounts receivable turnover ratio, you first determine the accounts receivable turnover ratio. The calculation is $360,000 of net credit sales divided by the average accounts receivable balance of $40,000 = 9. Next, divide 360 days per year by the accounts receivable turnover of 9 = 40 days.
