Average accounts receivable is the receivable balance a business carried across a period rather than on any one date, and the common formula adds the opening and closing balances and divides by two. It is an input, not a reported figure: no statement presents it, and the averaging method behind it is a convention the preparer picks rather than a rule any standard supplies.
average accounts receivable = (opening receivables + closing receivables) / 2Why an Average Is Needed at All
The ratios that use this figure pair something measured over a period with something measured at an instant, so a closing balance alone lets one afternoon stand in for a year. If that afternoon fell at a seasonal peak or trough, the ratio moves for a reason that has nothing to do with how customers pay.
How much of that an average cures depends on how many points go into it, and there are three in common use.
The Three Averaging Methods
The two-point average uses the opening and closing balances. The SEC’s own guide walks through the same convention for inventory turnover, taking the balance listed for the period of the report, adding the balance listed for the previous comparable period and dividing by two (SEC, Beginners’ Guide to Financial Statements). It needs nothing beyond a comparative balance sheet, and it is blind to everything that happened between the two dates.
The thirteen-point average uses the opening balance plus each month-end balance, divided by thirteen. A twelve-point variant drops the opening balance and averages the month-end balances alone, and that is the version a federal tax regulation writes down when it needs a collection period computed (26 CFR 1.482-2(a)(1)(iii)(E)). Either one follows a seasonal book month by month, and either is available to anyone reading their own ledger.
The five-point average uses the opening balance plus each quarter-end, divided by five. It is the compromise an outside reader can reach on an SEC registrant, because a quarterly filing carries an interim balance sheet as of the end of the most recent fiscal quarter and a balance sheet as of the end of the preceding fiscal year (17 CFR 210.10-01). Outside that population there is no interim balance sheet to read, which is why so many published figures are built on two dates.
How Far the Choice Moves the Answer
Take a tax-heavy practice whose receivables swell through filing season and drain over the summer. All figures below are in thousands.
opening (prior Dec) 350
Jan 620 Feb 780 Mar 910 Apr 840 May 520 Jun 380
Jul 300 Aug 290 Sep 340 Oct 310 Nov 330 Dec 360
sum of the twelve month-ends 5,980
two-point (350 + 360) / 2 = 355.0
thirteen-point (350 + 5,980) / 13 = 486.9
five-point (350 + 910 + 380 + 340 + 360) / 5 = 468.0Now run the same year’s billings against each one.
fees billed on terms, for the year 2,400
turnover 2,400 / 355.0 = 6.76 days 365 / 6.76 = 54.0
turnover 2,400 / 486.9 = 4.93 days 365 / 4.93 = 74.0
turnover 2,400 / 468.0 = 5.13 days 365 / 5.13 = 71.2One book, one year, and the collection period reads twenty days shorter under the method most sources print. The two-point average is not wrong, and it is not measuring the calmest dates either: both December balances sit near the middle of this book. What it cannot see is the skew. Four filing-season months pull the true average well above either December reading, and two dates have no way to register them.
The SEC’s own filing rule concedes the point. An interim balance sheet for the corresponding quarter of the preceding year need not be provided unless it is necessary for an understanding of the impact of seasonal fluctuations on the registrant’s financial condition (17 CFR 210.10-01), which is the rule admitting that two dates a year can hide a seasonal shape. State which method produced the figure whenever the answer travels.
Gross or Net of the Allowance
Allowances for doubtful accounts are set forth separately from the receivable, in the balance sheet or in a note to it (17 CFR 210.5-02), so both a gross and a net average are computable and they are not the same number.
Neither is the correct one in the abstract. What matters is that the average matches the numerator it will divide into. A numerator stated before any provision for uncollectible amounts pairs with a gross average; one stated after it pairs with a net average. Which receivables belong in the balance at all, before any averaging happens, is worked through in accounts receivable.
Where the Figure Is Used
It is the denominator of the receivables turnover ratio, and the days form of that same relationship follows from it, both covered in accounts receivable turnover ratio.
It is one of the three balances in the cash conversion cycle, alongside average inventory and average payables, and the averaging method should be the same for all three or the cycle adds up conventions rather than days.
It is one of two inputs used for days sales outstanding, which is often built on the closing balance instead. That difference is the reason two figures taken off the same statements will not reconcile exactly.
Common Questions
No. No accounting standard prescribes one, which is why the same business can report several defensible figures for the same year. What makes an answer usable is that the method, the period and the receivables included all travel with it.
The one with the most points it can get cheaply, which for a business reading its own ledger is the monthly average. The two-point version exists because outside analysts often have nothing else, and a firm looking at its own numbers is not in that position.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a real block of its own invoice-to-cash work through a trial task before anything client facing depends on it.
