Evaluation of Credit Policies/ Monitering Receivable

The collection policy followed by firm should be optimum. It should neither be too liberal nor too strict. Proper adjustment in credit policies should be made according to changing circumstances. To observe whether credit policy followed by firm is suitable or not, following methods can be used.

(1) Turnover of Accounts Receivable:-

This ratio is calculated by dividing annual credit sales by average accounts of receivables. The objective of this ratio is to measure liquidity.


Turnover of Accounts Receivable =Credit Sales during the Year

Average Accounts Receivable.


Average collection Period = Months or Days in a year

Turnover of Accounts Receivable

2) Aging Schedule of Receivable:-

In this schedule, receivables are classified on basis of their age. The main objective of preparing this schedule is to find out how much old are the receivable. It is prepared in form of a statement. With the help of this schedule management can find out such debtors & can adopt appropriate collection method for them whose average credit period is higher and which are older. Thus management can reduce possibility of bad debts. A specimen of this schedule is given as under:-

Aging schedule of Accounts Receivables

Period (No of Days)

No of Accounts

Amt (Rs)

No as % Total no.

Amt as % of total

0-20

100

30000

23.8

16.2

21-40

200

80000

41.6

43.2

41-60

40

20000

9.5

10.8

61-80

50

40000

11.9

21.6

81-100

20

10000

4.7

5.4

Over 100

10

5000

2.5

2.8

420

185000

100.00

100.00