How to Find Average Accounts Receivable on a Balance Sheet

Accounts receivable are a fundamental asset for businesses, representing money owed by customers for goods or services already delivered. Understanding how to calculate the average of this figure is valuable for anyone reviewing financial statements. This average provides a more representative view of the money tied up in customer credit over a period, moving beyond a single point-in-time balance.

Understanding Accounts Receivable

Accounts receivable (AR) represents the money that customers owe a company for products or services provided on credit. This amount is recorded on a company’s balance sheet as a current asset, expected to be collected within approximately one year.

Businesses extend credit to customers as a common practice, which can facilitate sales growth and expand the customer base. While this practice can boost sales, it also means a portion of the company’s earned revenue is not immediately available as cash.

Locating Accounts Receivable on the Balance Sheet

A balance sheet provides a snapshot of a company’s financial position at a specific moment in time, detailing its assets, liabilities, and owner’s equity. Accounts receivable is typically found under the “Current Assets” section of the balance sheet. Current assets are those expected to be converted into cash, consumed, or used up within one year or one operating cycle, whichever is longer.

The balance sheet presents accounts receivable as a single, static figure for the specific date the statement is prepared. For example, a balance sheet dated December 31, 2024, will show the total accounts receivable balance as of that exact date. Relying solely on a single balance sheet figure may not fully capture the average level of receivables over that entire duration.

Calculating Average Accounts Receivable

Calculating average accounts receivable provides a more stable representation of the money owed to a business over a specific period, smoothing out fluctuations. The most common method involves taking the sum of the beginning and ending accounts receivable balances for a period and dividing by two. This calculation is useful when comparing receivables to other financial metrics that cover a period, such as sales.

The formula for average accounts receivable is:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

To illustrate, consider a company, “Example Corp.,” analyzing its accounts receivable for the year ended December 31, 2024. Example Corp.’s balance sheet shows accounts receivable of $150,000 on December 31, 2023, and $170,000 on December 31, 2024. Applying the formula, ($150,000 + $170,000) / 2 yields an average accounts receivable of $160,000 for the year. This approach can be applied to any defined period, such as a quarter or a month.

What Average Accounts Receivable Tells You

Average accounts receivable represents the typical amount of money owed to a company by its customers over a specific period. This figure provides insight into the average volume of outstanding invoices the business manages. It offers a more representative view than a single balance sheet figure because it accounts for changes in receivables over the period, such as those that occur with regular sales and collections.

The average amount helps to smooth out temporary spikes or dips in receivables that might occur on a specific balance sheet date. This smoothed figure is useful for understanding the general level of credit extended to customers throughout the period. It indicates the consistent amount of capital tied up in customer credit, offering a clearer picture of the financial resources dedicated to financing customer purchases.