Understanding the Average Collection Period Calculation
The average collection period is calculated as 365 divided by the accounts receivable turnover ratio. The turnover ratio for accounts receivable evaluates how rapidly a business receives money from its clients. It is computed by subtracting the average accounts receivable balance from the net credit sales.
Once you have the accounts receivable turnover ratio, you can calculate the average collection period by dividing 365 (the number of days in a year) by the turnover ratio. This will give you the number of days it takes for the company to collect payments from its customers on average.
The typical duration of time it takes a business to obtain money from a consumer after a sale is made is known as the average collection period. To calculate the average collection period, you first need to determine the accounts receivable turnover ratio.
Once you have the accounts receivable turnover ratio, you can calculate the average collection period by dividing 365 by the accounts receivable turnover ratio.
Final Answer:
The average collection period is calculated by dividing the number of days in a year by the accounts receivable turnover ratio.
Explanation:
The average collection period is calculated by dividing the number of days in a year (365) by the accounts receivable turnover ratio. The accounts receivable turnover ratio is calculated by dividing net credit sales by the average accounts receivable. Here is the formula:
Average Collection Period = 365 / Accounts Receivable Turnover Ratio
For example, if the accounts receivable turnover ratio is 10, the average collection period would be 365 / 10 = 36.5 days.
What is the formula for calculating the average collection period?
The formula for calculating the average collection period is 365 divided by the accounts receivable turnover ratio.