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  • The Daily Technical #132: Why is deferred revenue classified as a liability while accounts receivable is an asset?

The Daily Technical #132: Why is deferred revenue classified as a liability while accounts receivable is an asset?

How to answer "What does accounts receivables turnover measure?"

March 13, 2025

Good afternoon. Welcome to the 132nd edition of The Daily Technical.

Now, you’re here for one reason, so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What does accounts receivables turnover measure?

Accounts receivable turnover is a metric used to measure the number of times per year that a company can collect its average accounts receivable from customers. The higher the turnover ratio, the better, as it indicates the company is efficient at collecting its due payments from customers who paid on credit.

Receivables Turnover = Revenue / (Average of Beginning and Ending Accounts Receivables)

Common Mistakes

  1. Giving an incomplete breakdown of the formula. Remember, it's critical to mention that the metric involves total revenue and the average of beginning and ending accounts receivables, as precise calculations hinge on these specifics.

  2. Omitting how average accounts receivables are calculated. Ensure clarity by stating it involves adding beginning and ending balances and dividing by two, illuminating how this impacts the annual turnover.

  3. Ignoring Context and Industry Differences. Every industry has unique characteristics affecting turnover expectations. Highlighting that industry-specific norms should anchor any comparison ensures you recognize the broader context behind the numbers.

TL;DR

  • Metric Purpose: Measures collection efficiency; higher turnover indicates efficient collection.

  • Calculation: Revenue / (Average of Beginning and Ending Accounts Receivables).

  • Interpretation: High ratio = quick collection from credit customers.

  • Significance: Efficiency in managing credit risk and cash flow.

TODAY’S QUESTION
Why is deferred revenue classified as a liability while accounts receivable is an asset?

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