Thursday, 20 July 2017

Trade receivables - Meaning, Day & Turnover Ratio / Formula Calculation

Trade receivables

Trade Receivables - It is the total amount receivable to a business for sale of goods or services provided as a part of their business operations. Trade receivables arise when a business makes sales or provides a service on credit.

One of the factors that support the company's success in achieving its objectives is concerned the sale of a product from a manufacturer to the consumer. Reconsideration of the receivable is one form of investment, he is no different to other investments as intangible investment funds cash and bank.

Accounts receivable trade accounts receivable is also called is a bill on the other party (on the lender or customers) as a result of the sale of goods on credit (on Account) or because the giving loans to the clerk, to the officials of the company, or its subsidiaries and other stuff.


The definition of trade can be explained that the receivables are receivables to other parties (creditors) or any other party as a result of the sale of goods in credit, or because the granting of loans to other parties. As one form of investment, then it can be called trade receivables:

  1. Absorb a certain amount of the Working Capital Fund
  2. Have a certain age in accordance with dependencies
  3. Level of processing efficiency driven Need from time to time.
  4. Affect the level of risk the company as a whole.

As one form of wealth trade accounts receivable in as elements of the current assets. Thus the receivable has a fast turnaround time and less than a year. Accounts receivable trade as investment will provide certain benefits for the company.

Some of the benefits that can be obtained to perform credit sales, among others:

  1. Is an effort to increase turnover
  2. By increasing sales volume, then the profit is expected to rise. Thus, this credit has positive consequences in terms of the assessment of the investment.
  3. The existence of the relationship of debt receivables, then the relationship between the company merchandise with buyers becoming more tightly, so that the credit guarantees continents to do.
  4. On the specific type of business venture, as a manufacturer of cheap homes and commercial vehicles for the seller.

If various types of expenses that arise because the company sell with credit, among others:

1. The burden of capital costs receivable as one form of investment which absorb capital from the company as available.
2. In addition to the hanging of the cost then the receivable will also cause other types of costs i.e. the costs of the administration of accounts receivable comprise:

  • The cost of organization or work unit delegated the task of managing receivables and other social guarantees for administering accounts receivable and billing clerk.
  • Accounts receivable billing Costs. Accounts receivable in order to be paid on time to do the effort to collect fees in the form of phone calls, correspondence, telegrams or travel expenses.

3. Accounts receivable not entirely be charged, because the debtor a run or go bankrupt. There are accounts receivable jammed or not can be collectible at all. Resulting in no collectible (beddebets) so that the formed reserves receivable doubtful assisted through the Elimination of most sales and profits.

Furthermore, because accounts receivable can provide additional benefits but also results in growing losses, it needs to be made a clear wisdom set about that issue.

As the steps that need to be prepared, among others, include:

1. Establishment of a working unit or section specifically tasked to manage accounts receivable. Basic tasks of this unit:
  • Looking for potential subscriptions that can be given the credit.
  • Select the nominees of the debtor
  • Obtain credit transactions that occurred.
  • Perform billing accounts receivable
  • Open a mutation/credit or accounts receivable.
  • Develop and classify the receivables out standing according to each age.
  • The develop and estimate inflows from accounts receivable
  • Report on the management of accounts receivable for the taking and the wisdom of accounts receivable.
2. Outlined a clear accounts receivable for discretion can be used as a guide for work units that maintain the accounts receivable that wisdom include:
  • Determination of credit ceiling to the various types or levels of customer subscriptions
  • The determination of the period of credit.
  • Guidelines for the selection of candidates based on the debtor's conduct 5 C or 3 R. Determination of the amount of accounts receivable.d. hesitant maximums can be justified as the basis for the determination of the magnitude of the doubtful receivable reserves.
  • Determination of the amount of the budget is used for administer accounts receivable.
3. The determination of criteria for measuring the efficiency of the management of accounts receivable. Based on the criteria that can be used as an indication.

Trade Receivables Formula:

Days = Trade Debtors / Revenue (Sales) x 365

Trade Receivables = Trade Receivables/ Total Credit Sales x Number of Days

Percentage of accounts receivable that are not collectible.

This level needs to be compared with the average accounts receivable not collectible for industrial or other similar efforts. During this relatively comparable percentage level then the efficiency of the management of accounts receivable by the company can still be considered within the limits of reasonableness. When this percentage exceeds industry or other similar efforts, it needs to be done to know their causes are special analysis clearly, the average age of accounts receivable.

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