The average will be more representative as you consider more daily balances in the computation. For example, if you compute the average balance for the year 2012 by using the balances from two days (December 31, 2011 and December 31, 2012), you are ignoring the balances on the other 364 days of 2012. That’s a problem if the majority of the company’s activity occurs in the months of March through October. If that’s the case, using only the December 31 balances will result in an average that is misleading.

To overcome the shortcoming of using the balance at the beginning of the year and the balance at the end of the year, some accountants use 13 balances: the balance at the beginning of the year plus the balances at the end of each month. For example, the 2012 average would be calculated using the ending balance on December 31, 2011 + the ending balance on January 31, 2012 + the ending balance on February 28, 2012 and so on. Obviously, this is better than using only the two December 31 balances. Of course you need to have access to the monthly balances.

Still better is to compute the average for the year by using the balances on each of the 365 days in the year—thereby considering fluctuations that occur within a month.

If you need a monthly average for accounts receivable, the logic is the same: 30 or 31 points of data is far better than merely using the beginning of the month balance and the end of the month balance.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years. He is the creator and author of all the content found on AccountingCoach.com. You can read 1,500 testimonials praising his ability to explain accounting in a way that anybody can understand.

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