What is the days' sales in accounts receivable ratio?
The days' sales in accounts receivable ratio, also known as the number of days of receivables, tells you the average number of days it takes to collect an account receivable. Since the days' sales in accounts receivable is an average, you need to be careful when using it.
The calculation for determining the days' sales in accounts receivable is the number of days in the year (usually 360 or 365 days is used) divided by the accounts receivable turnover ratio for a specific year. If a company's accounts receivable turnover ratio was 10, then the days' sales in accounts receivable is 36 days (360 days divided by the turnover ratio of 10).
Since the accounts receivable turnover ratio used in the days' sales in accounts receivable was based on 1) the credit sales during a one-year time period, and 2) the average accounts receivable balances during that one-year period, the 36 days calculated above is an average. It is possible that within the accounts receivable there are some accounts which are 120 days or more past due. This information might be hidden by the average, because the average included some accounts that paid early. Therefore, it is best to review an aging of accounts receivable by customer to understand the detail behind the days' sales in accounts receivable ratio.
