How to Calculate the Ending Accounts Receivable Balance

Accounts receivable (AR) represents the money owed to a business for goods or services that have been delivered to customers but not yet paid for. It is an important current asset for many companies, reflecting expected future cash inflows. Understanding the ending balance of accounts receivable is crucial for assessing a business’s financial health and its ability to generate cash. This balance provides insight into how efficiently a company manages its credit sales and collections.

Key Components Affecting Accounts Receivable

Before calculating the ending accounts receivable balance, it is necessary to identify the various transactions that impact this figure. The starting point for any period’s calculation is the beginning accounts receivable balance, which is the total amount customers owed at the close of the previous accounting period. This balance serves as the foundation upon which current period changes are built.

Credit sales increase accounts receivable, as these are sales made on account where payment is deferred. Businesses typically record credit sales through documents like sales invoices and sales journals. Conversely, cash collections, which are payments received from customers for outstanding invoices, decrease the accounts receivable balance. Information on cash collections is usually found in cash receipts journals or bank statements.

Other less frequent adjustments can also influence accounts receivable. Sales returns and allowances, for example, reduce the amount customers owe when goods are returned or price adjustments are made. Additionally, bad debt write-offs occur when a business determines that a specific amount owed by a customer is uncollectible, requiring its removal from the accounts receivable records to ensure accurate financial reporting.

Calculating the Ending Accounts Receivable Balance

This calculation takes into account the balance from the start of the period, adds new credit sales, and then subtracts payments received and any other reductions. The fundamental formula is: Beginning Accounts Receivable + Credit Sales – Cash Collections = Ending Accounts Receivable.

To apply this, locate the total accounts receivable balance from the end of the prior period. Then, sum all credit sales made during the current period. Total all cash payments received from customers during the period, along with any sales returns, allowances, or bad debt write-offs, as these reduce the outstanding amounts.

For example, if a business began the month with $10,000 in accounts receivable, recorded $20,000 in new credit sales, and collected $15,000 from customers, the ending accounts receivable balance would be $15,000. This is derived by adding the $20,000 in credit sales to the $10,000 beginning balance, resulting in $30,000, and then subtracting the $15,000 in cash collections.

Reconciling and Reporting the Ending Balance

Reconciling the calculated balance involves comparing it to the individual customer accounts in the subsidiary ledger to ensure all transactions are properly recorded and matched. An accounts receivable aging report is a common tool for this, categorizing outstanding invoices by how long they have been due.

This reconciliation process helps identify any discrepancies, such as data entry errors, missed payments, or incorrect postings, allowing for timely corrections. Regularly reviewing an aging report provides insight into customer payment behavior and helps prioritize collection efforts for overdue accounts.

The final ending accounts receivable balance is reported on the balance sheet as a current asset. Accounts receivable is considered a current asset because it represents money expected to be converted into cash within one year. This balance is important for evaluating a company’s liquidity, its ability to cover short-term obligations, and its overall cash flow forecasting.