The turnover ratio of receivables and calculation types

According to multiple sources, the concept of accounts receivable is characterized by the amount of debt that some entities are required to pay other economic entities on the basis of their economic interactions. Typically, these debts are the result of sales on credit.

In accounting under accounts receivable refers to property rights as the object of regulation of civil law. The content of these rights set forth in article 128 of the civil code, and includes: things, money, services, securities, information, intellectual property, other assets, and intangible benefits. As a result of this interpretation accounts receivable acts as part of the company's property, and the right to receive, respectively, is a property right.

It Should be noted that in economic practice, no single entity can not do without it, because the establishment of a receivable due to objective circumstances, namely:

• The debtor is access to additional free working capital;
• The creditor is the opportunity to actively expand the market.

The Formation of receivables contributes to a situation in which the time of change of ownership does not coincide with the moment of payment.

One of the main factors in the success of the company or of the company is the increase in accounts receivable compared to the amount payable. In its simplest form, a receivable should be taken in three types of manifestation:

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• First, it acts as a method and resource which can be used to pay off accounts payable;
• Second is a portion of products that consumers have already implemented, but not yet received payment for shipped goods;
• Third, it is part of current assets which are formed from the own sources of the enterprise or organization.

Therefore, the most important measure of accounts receivable is the ratio of turnover of receivables, referred to as "RT". In the most simple, classic form is defined as the quotient of the index of turnover on the average value of accounts receivable. Calculated similarly, the coefficient of accounts receivable turnover shows the efficiency of the enterprise or company to demand payment for products shipped to customers. The decrease in the value of the coefficient indicates an increase in the number of insolvent customers, and also about any further problems with the sale of products. This is a very alarming signal for the company because the lower the turnover, the need for working capital will be higher.

There are several ways that may impact the turnover ratio of receivables. For example, the widely used method, which expresses turnover as the average number of days required for collection of payments, it is called a collection period of receivables (CP) and is calculated as follows:

SR = (RT / N) x 365

Where N – the sales volume of and 365-number of days in a year.

If you use a different study period, the number 365, respectively, is changed to the number of days of the study period.

In Addition, the coefficient of accounts receivable turnover allows you to identify trends in its values. For example, it will increase at a constant rate of turnover inevitably leads to the increase of profitability of the capital invested in production, and Vice versa.