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.
