Business Glossary

degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held-and the less likely they are to be collected. Also, there is an opportunity cost of tying up funds in receivables for a longer period of time. The accounts receivable turnover equals:

Annual Credit Sales Average Accounts Receivable

Assume annual credit sales are $100,000, beginning-of-year accounts receivable are $30,000, and end-of-year accounts receivable are $20,000. The turnover is:

If sales vary greatly during the year, this ratio can become distorted unless proper averaging takes place. In such a case, quarterly or monthly sales figures should be used.

classifying accounts by the time elapsed after the date of billing or the due date. The longer a customer's account remains uncollected or the longer inventory is held, the greater is its realization risk. If a customer's account is past due, the company also has an opportunity cost of funds tied-up in the receivable that could be invested elsewhere for a return. An aging schedule of accounts receivable may break down receivables from 1-30 days, 31-60 days, 61-90 days, and over 90 days. With regard to inventory, if it is held too long, obsolescence, spoilage, and technological problems may result. Aging can be done for other accounts such as fixed assets and accounts payable.

ratio of a company's accounts receivable to its average daily sales. Average daily sales are obtained by dividing sales for an accounting period by the number of days in the accounting period-annual sales divided by 365, if the accounting period is a year. That result, divided into accounts receivable (an average of beginning and ending accounts receivable is more accurate), is the collection ratio-the average number of days it takes the company to convert receivables into cash. It is also called average collection period.

degree of realization risk in accounts receivable. The lower the turnover rate, the longer receivables are being held-and the less likely they are to be collected. Also, there is an opportunity cost of tying up funds in receivables for a longer period of time. The accounts receivable turnover equals:

Annual Credit Sales Average Accounts Receivable

Assume annual credit sales are $100,000, beginning-of-year accounts receivable are $30,000, and end-of-year accounts receivable are $20,000. The turnover is:

If sales vary greatly during the year, this ratio can become distorted unless proper averaging takes place. In such a case, quarterly or monthly sales figures should be used.

classification of trade accounts receivable by date of sale. Usually prepared by a company's auditor, the aging, as the schedule is called, is a vital tool in analyzing the quality of a company's receivables investment. It is frequently required by grantors of credit.

The schedule is most often seen as: (1) a list of the amount of receivables by the month in which they were created; (2) a list of receivables by maturity, classified as current or as being in various stages of delinquency. The following is a typical aging schedule.

	dollars (in thousands)
Current (under 30 days)	$14,065	61	%
1-30 days past due	3,725	16
31-60 days past due	2,900	12
61-90 days past due	1,800	8
Over 90 days past due	750	3
	23,240	100	%

The aging schedule reveals patterns of delinquency and shows where collection efforts should be concentrated. It helps in evaluating the adequacy of the reserve for bad debt, because the longer accounts stretch out the more likely they are to become uncollectible. Using the schedule can help prevent the loss of future sales, since old customers who fall too far behind tend to seek out new sources of supply.

obligations to pay for goods or services that have been acquired on open account from suppliers. Accounts payable is a current liability in the balance sheet.