Accounts Receivable Turnover is supposed to be NET CREDIT SALES/AVERAGE ACCOUNTS RECEIVABLE.
I understand how to get the average AR value, but I’m not sure what Net Credit Sales are. Is this supposed to be the amount of goods you sold to customers on credit?
http://smallbusiness.chron.com/calculate-credit-sales-using-accounts-receivable-25323.html
This article says net credit sales = cash received - starting AR + ending AR.
To me that makes no sense: if you received cash for it, then it wasnt a credit sale was it?
The article says that the ‘cash received’ is cash received from credit customers only. So during the year when you’re making sales, they’re paying off what they owe you.
So the total sales in the period to customers who paid on credit (as opposed to upfront cash) is what you received in cash, plus any change in accounts receivable.
Say for example you received 100 worth of cash from customers, receivables at the start of the period were 20 and at the end they were 30. This means that receivables increased by 10 i.e sales you have made but cash that has not been collected yet.
As such total credit sales are: 100+10=110.
Net credit sales are credit sales minus any discounts allowed.
For example, you made a credit sale of $100 with credit terms 2/10, n/30.
If the customer pays back within 10 days, you will have allowed him a 2% discount and NET credit sales would be 98.
As for that formula, don’t let the “cash received” part confuse you. Its there because credit sales usually do convert into cash received.