Average Collection Period | Formula, Examples | Calculation

In this video on Average Collection period, we are going to discuss the formula of average collection period, including some examples. 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐨𝐥𝐥𝐞𝐜𝐭𝐢𝐨𝐧 𝐏𝐞𝐫𝐢𝐨𝐝 -------------------------------------------- Average Collection Period is the collection period is the time between the credit sales are made and the cash is paid. 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐨𝐥𝐥𝐞𝐜𝐭𝐢𝐨𝐧 𝐏𝐞𝐫𝐢𝐨𝐝 𝐅𝐨𝐫𝐦𝐮𝐥𝐚 ----------------------------------------------------------- Here’s the formula for average collection period Average Collection Period = 365 Days / Accounts Receivables Turnover Ratio 𝐀𝐥𝐭𝐞𝐫𝐧𝐚𝐭𝐢𝐯𝐞 𝐅𝐨𝐫𝐦𝐮𝐥𝐚 𝐭𝐨 𝐜𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐨𝐥𝐥𝐞𝐜𝐭𝐢𝐨𝐧 𝐏𝐞𝐫𝐢𝐨𝐝 ------------------------------------------------------------------------------------------------------ Average Collection Period = Average Accounts Receivable Per Day / Average Credit Sales Per Day 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐨𝐥𝐥𝐞𝐜𝐭𝐢𝐨𝐧 𝐏𝐞𝐫𝐢𝐨𝐝 𝐄𝐱𝐚𝐦𝐩𝐥𝐞 ------------------------------------------------------------- BIG Company decides to increase its credit term. The top management of the company requests the accountant to find out the collection period of the company in current scenario. Below is the information available to the accountant. Net Credit Sales for the year – $260,000 Accounts Receivables at the beginning of the year – $60,000 Accounts Receivables at the end of the year – $50,000 As an accountant, find out the collection period of BIG Company. Here, we need to calculate the average accounts receivable. beginning and ending accounts receivables are $60,000 and $50,000 average accounts receivables for the year would be = ($60,000+ $50,000) / 2 = 110000 / 2 = 55000 Now, we will find out the accounts receivables turnover ratio. Net Credit Sales/Average Accounts Receivable = 260000/55000 Accounts Receivable Turnover Ratio = 4.7 Now, we can do the Average Collection period calculation Collection Period = 365 / Accounts Receivable Turnover Ratio 365/4.7 = 78 Days To know more about Average Collection Period, you can go to this 𝐥𝐢𝐧𝐤 𝐡𝐞𝐫𝐞: https://www.wallstreetmojo.com/average-collection-period/ Subscribe to our channel to get new updated videos. Click the button above to subscribe or click on the link below to subscribe - /channel/UChlNXSK2tC9SJ2Fhhb2kOUw

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