The Formula and Calculation of Average Collection Period in Accounting

The average collection period formula and calculation

In commercial accounting, the average collection period is calculated by dividing 365 days by the receivable turnover ratio. This formula provides the average number of days that a company takes to collect its receivables.

The correct formula for calculating the average collection period is 365 days divided by the receivable turnover ratio. This ratio tells you how long, on average, it takes for a company to collect its accounts receivables.

Here's an example to illustrate how the calculation works. Let's say a company has a receivable turnover ratio of 5. This means the company collects its receivables 5 times per year, on average.

To find the average collection period, you would divide 365 days by 5, which equals 73 days. Therefore, on average, it takes this company 73 days to collect its receivables.

About the topic

The subject of this question is related to accounting and business finance. Understanding the average collection period is essential for assessing a company's efficiency in collecting its accounts receivables. Monitoring this metric can help businesses manage their cash flow effectively and improve their financial performance.