Definition of Days' Sales in Accounts Receivable
The days' sales in accounts receivable ratio (also known as the average collection period) tells you the number of days it took on average to collect the company's accounts receivable during the past year.
Example of Calculating Days' Sales in Accounts Receivable
The days' sales in accounts receivable can be calculated as follows: the number of days in the year (use 360 or 365) divided by the accounts receivable turnover ratio during a past year. For example, if a company's accounts receivable turnover ratio for the past year was 10, the days' sales in accounts receivable was 36 days (360 days divided by the turnover ratio of 10).
Caution
The accounts receivable turnover ratio used above was calculated as follows:
- The credit sales during the past year (cash sales are not included since they were not part of accounts receivable) divided by the next item...
- The average accounts receivable balances during the past year
It is possible that within the average accounts receivable balances there are some receivables that are 120 days or more past due. These could easily be buried in the average if most customers are remitting the amounts by the dates the receivables are due. 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.
