How to Calculate Ending Accounts Receivable

For businesses that offer products or services on credit, understanding accounts receivable (AR) is fundamental to managing financial health. Accounts receivable represents money owed to a business by its customers for goods or services already delivered but not yet paid for. Calculating the ending accounts receivable balance is a regular accounting practice that provides insight into a company’s financial position at a specific point in time.

Understanding Accounts Receivable Basics

Accounts receivable is a current asset on a company’s balance sheet, representing the total amount of money customers owe for credit sales. This arises when a business delivers goods or services and then invoices the customer, allowing a period for payment, such as 30 or 60 days.

Tracking accounts receivable, including the ending balance, is important for assessing a business’s financial health and making informed decisions. Effective management of AR directly impacts cash flow, ensuring a steady inflow of funds to cover operational expenses and invest in growth opportunities. It also serves as a measure of a company’s sales performance and the effectiveness of its credit policies.

Key Components of the Calculation

Calculating ending accounts receivable requires specific financial data that businesses track through their accounting systems. Three core components are necessary for this calculation.

Beginning Accounts Receivable is the total balance of money owed to the business by its customers at the start of a given accounting period. This figure is carried over from the previous period’s ending balance. It represents the outstanding customer invoices that were unpaid as the new period began.

Credit Sales include all sales made to customers during the accounting period where payment was not received immediately. These are sales where the business extended credit, allowing customers to pay at a later date, and are distinct from cash sales which are paid for upfront. Businesses track credit sales through sales invoices and sales journals, ensuring that only transactions made on credit are included in this figure.

Cash Collections from Accounts Receivable represents the total cash payments received from customers during the period specifically for sales previously made on credit. This amount reflects the actual money collected from outstanding invoices. Businesses typically obtain this figure from cash receipts journals, bank statements, or by reviewing payments applied against customer accounts.

Applying the Ending Accounts Receivable Formula

The ending accounts receivable balance is calculated using a straightforward formula that integrates the components discussed previously. The formula is:

Ending Accounts Receivable = Beginning Accounts Receivable + Credit Sales – Cash Collections from Accounts Receivable.

For example, suppose a hypothetical business started a month with a Beginning Accounts Receivable balance of $50,000. During that month, the business made new Credit Sales totaling $120,000. Over the same period, the business successfully collected $100,000 in Cash Collections from its customers for previous credit sales.

Applying the formula: Ending Accounts Receivable = $50,000 (Beginning AR) + $120,000 (Credit Sales) – $100,000 (Cash Collections). This results in an Ending Accounts Receivable balance of $70,000. This balance then becomes the beginning accounts receivable for the subsequent accounting period.