Question

List two ratios and one report schedule used to monitor accounts receivable.

Answer 1

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

Where:

• Net credit sales are sales where the cash is collected at a later date. The formula for net credit sales is = Sales on credit – Sales returns – Sales allowances.
• Average accounts receivable is the sum of starting and ending accounts receivable over a time period (such as monthly or quarterly), divided by 2.

2.The average collection period can be calculated as follows: 365 days in a year divided by the accounts receivable turnover ratio. Assuming that a company has an accounts receivable turnover ratio of 10 times per year, the average collection period is 36.5 days(365 divided by 10).

Schedule used to monitor AR

Ageing Schedule:

The ageing schedule of debtors is prepared basing on the collection pattern. The total debtors balances are classified according to their age i.e. the outstanding period for which the amount is uncollected. The ageing schedule provides useful information for assessing the company’s liquidity position, efficiency of credit control department, efficiency in collection of receivables, comparison with previous ageing schedules etc.

The age analysis of debtors may be used to help decide what action to take about older debts. For better control on collection of receivables, ageing schedule is prepared and analyzed for identifying the overdue amounts. Ageing schedule of receivables is prepared according their period of outstanding, for example, less than 30 days, 31-45 days, 46 – 60 days, 61-75 days, 76-90 days, above 90 days etc.

The ageing schedule of debtors can be prepared manually or by computer. Preparation of the schedule requires to go back to the date on which invoice is raised. The schedule is used for identifying the quality accounts, overdue accounts and trouble some accounts. The age schedule can also incorporate the details of individual accounts, region wise accounts, industry sector wise accounts etc.