This ratio determines how quickly a company collects outstanding cash balances from its customers during an accounting period. It finds out how efficiently the assets are employed by a firm and […] Example: Suppose a firm has total sales of Rs 5,00,00 out of which the credit sales are Rs 2,50,000. But in some cases too high ratio can indicate that the company's credit lending policies are too stringent, pr… One of the major activity ratios is the receivables or debtors turnover ratio. Some of the turnover ratios are as follows : Stock Turnover Ratio : STO Debtors Turnover Ratio : DTO Creditors Turnover Ratio : CTO 1) Stock Turnover Ratio It commonly measures the activity or liquidity of the firm’s stock.. The company takes funding, financing and investing decisions on this basis. But when the information about opening and closing balances of trade debtors and credit sales is not available, then the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given. Also learn latest Accounting & management software technology with tips and tricks. It indicates the number of times the debtors are turned over a year. The higher the value the more efficient is the management of debtors. Currently, the receivable turnover ratio for Google is 7 times. 45 to 65 days may be considered as normal. Receivable Turnover/ Debtors Turnover: - Receivable Turnover ratio is used to see the company’s efficiency in collecting its receivables or the money owed by clients. Credit is one of the important elements of sales promotion. It must be noted that while calculating debtors turnover ratio or average collection period, the figure of trade debtors should be taken before deducting bad and doubtful debts or provision for bad and doubtful debts as otherwise the results may be misleading, as follows: It looks as if situation (ii) is better because average collection is 57 days against 60 days in the first situation. This ratio is otherwise called as creditors velocity. The receivables turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its receivables or money owed by … This ratio is calculated to find the time taken in paying the creditors amount. Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors. Receivable turnover ratio or debtor turnover ratio is an activity ratio that indicates the efficiency of the company in managing its receivable balance. Net credit sales= Gross sales – cash sales – sales return = Rs.2,00,000 – Rs.40,000 – Rs.14,000=Rs. Goods are sold on credit based on credit policy adopted by the firm. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.. The accounts receivable turnover ratio, also known as the debtor’s turnover ratio, is an efficiency ratio Financial Ratios Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company that measures how efficiently a company is collecting revenue – and by extension, how efficiently it is using its assets. So, the average collection period should be compared with the firm’s credit terms and policy to evaluate its collection efficiency, and further a trend may be found of various years to judge any improvement or otherwise in its efficiency for debt-collection. It is a ratio of net credit purchases to average trade creditors. Creditor’s Turnover Ratio or Payables Turnover Ratio Creditor’s turnover ratio is also known as Payables Turnover Ratio, Creditor’s Velocity and Trade Payables Ratio. It is on the pattern of debtors turnover ratio. Formula: It shows how quickly receivables or debtors are converted into cash. This ratio is complementary to the Debtor Turnover Ratio. Accounts … It measures the quality of debtors. Creditors or Payable turnover Ratio. It is the reliable measure of receivables from credit sales. Debtors Turnover Ratio indicates the speed at which the sundry debtors are converted in the form of cash. Debtors Turnover Ratio = Total Sales / Debtors. Also, net credit sales mean total credit sales less sales returns if any. Creditors turnover ratio is also know as payables turnover ratio. Accounts payable turnover … Debtors Turnover Ratio Problems. Velocity refers to “speed” with which an object travel. The fixed assets of a company are very crucial in revenue generation and thus the optimization of the fixed asset use increases the sales if done … A higher ratio means that the company is collecting cash more frequently and/or has a good quality of debtors. Debtor’s Turnover Ratio or Receivables Turnover Ratio Debtor’s turnover ratio is also known as Receivables Turnover Ratio, Debtor’s Velocity and Trade Receivables Ratio. It signifies the credit period enjoyed by the firm in paying creditors. It should be noted that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected. Usually, a high inventory turnover/Stock velocity indicates efficient management of inventory because more frequently the stocks are sold, the lesser amount of money is required to finance the inventory. Illustration 3: From the following information, calculate average collection period: Before publishing your articles on this site, please read the following pages: 1. It is the reliable measure of receivables from credit sales. Allied and closely related to this is the average collection period. Ques. Trade debtors are expected to be converted into cash within a short period of time and are included in current assets. Conclusion: Accounts Receivable Turnover (Days) demonstrates the debtors' influence on the financial condition of a company. Steady debtors turnover ratio shows company is able to manage their receivable steadily. Debtor Days Formula = (Average Accounts Receivable / Annual Total Sales) * 365 days Receivable Days Formula can also be expressed as average accounts receivable by average daily sales. Similarly, a comparison should be made for firm’s average collection period of the industry or some other films in the industry doing a similar business. But the effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors (or receivables, i.e., debtors plus bills receivables). Debtor Days Ratio = (Average accounts receivable / Average daily sales) Explanation. On the contrary low turnover ratio and longer collection period indicates delayed payments by the debtor. Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. A business concern generally adopts different methods of sales. It represents sales for which payment has not been collected yet. Where, Average Account Receivable includes trade debtors and bill receivables. Receivable Turnover Ratio or Debtor's Turnover Ratio is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts. This ratio measures the efficiency with which Accounts Receivable are being managed, hence it is also known as ‘Accounts Receivable Turnover ratio’. Accounts receivable turnover ratio simply measures how many times the receivables are collected during a particular period. A receivable turnover ratio of 2 would give an average collection period of 6 Months (12 Months / 2) and similarly 6 would give 2 Months (12 Months / 6). and formula can be written as follows. Return on shareholders investment or net worth. The two basic components of accounts receivable turnover ratio are net credit annual sales and average trade debtors. The high debtors turnover ratio refers to effective management of sales or debtors and liquid of debtors and vice versa. You can avail of a variety of resources from Experts on ratio analysis, financial statements, analysis of the financial position, and debtors' turnover ratio. Only credit sales establish a receivable, so the cash sales are left out of the calculation. But a precaution is needed while interpreting a very high debtors turnover ratio because a very high ratio may imply a firm’s inability due to lack of resources to sell on credit thereby losing sales and profits. It indicates the number of times the debtors are turned over a year. Credit sales $25,000; Return inwards $1,000; Debtors $3,000; Bills Receivables $1,000. (c) Creditors’ Turnover Ratio: It indicates the number of times on the average that the Creditors turnover each year. Debtors Turnover Ratio indicates the speed at which the sundry debtors are converted in the form of cash. Usually, the higher turnover ratio is preferred as it indicates the company’s efficiency to collect its receivables. Stock turnover ratio Debtors turnover ratio Return on investments Return on from MANAGEMENT MISC at University of Mumbai Addition of materials and beginning inventory, Business and Quality Improvement Programs, Accounting Ratios Definition, Advantages, Classification and Limitations, Ratio of fixed assets to shareholders funds, Ratio of current assets to shareholders funds, Limitations of Financial Statement Analysis, Creditors / Accounts Payable Turnover Ratio, Current Assets to Proprietor’s Fund Ratio, Return on Shareholders Investment or Net Worth Ratio, Accounting Principles and Accounting Equation. Formula: In above formula, numerator includes only credit purchases. A firm calculates ratios using the financial data and carries out Ratio Analysis to interpret the results meaningfully. Required fields are marked *. The receivable turnover ratio (debtors turnover ratio, accounts receivable turnover ratio) indicates the velocity of a company's debt collection, the number of times average receivables are turned over during a year. 1,46,000 While calculating debtors, the provision for bad and doubtful debts should not be deducted from them. Definition: The Debtors Turnover Ratio also called as Receivables Turnover Ratio shows how quickly the credit sales are converted into the cash. Creditor’s Turnover Ratio or Payables Turnover Ratio Creditor’s turnover ratio is also known as Payables Turnover Ratio, Creditor’s Velocity and Trade Payables Ratio. Hence, the liquidity position of concern to pay its short term obligations in time depends upon the quality of its trade debtors. Similarly, lower the ratio means inefficient management of debtors. Accounts payable turnover ratio (also known as creditors turnover ratio or creditors’ velocity) is computed by dividing the net credit purchases by average accounts payable.It measures the number of times, on average, the accounts payable are paid during a period. Ans. Calculate debtor’s turnover ratio from the information provided below; Total Sales – 5,00,000. Image Guidelines 5. Receivable turnover ratio meaning When the company makes a sale of a product or service, it often provides a certain credit period for the buyer to make the payment. Accounts payable turnover ratio (also known as creditors turnover ratio or creditors’ velocity) is computed by dividing the net credit purchases by average accounts payable.It measures the number of times, on average, the accounts payable are paid during a period. In the absence of opening and closing balances of trade debtors and credit sales, the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (including bills receivable). It is very. Example of debtors turnover ratio is when net credit sales of the company for the year is $90000 and account receivable outstanding at the beginning of the year is $20000 and account receivable outstanding at the end of year is $10000 than average receivables will be $15000 and debtors turnover ratio will be $90000/$15000 that is 6 times. Plagiarism Prevention 4. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. A business concern may not purchase its all items on cash basis. This is the ratio which measures how much sale is generated from churning the fixed assets of the company and how efficiently it is done. There is no ‘rule of thumb’ or ‘standard’ which may be used as a norm while interpreting this ratio as the ratio may be different from firm to firm depending upon its credit policy, nature of business and business conditions. You can use our Financial Statement Analysis App to calculate ratio and generete conclusion automatically. Example – Receivables Turnover Ratio. Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. Debtor’s Turnover Ratio = Net Credit Sales / Average Debtors. It is an activity ratio that finds out the relationship between net credit purchases and average trade payables of a business. Let us make an in-depth study of the meaning and types of debtors turnover ratio. The trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills Receivables. Like receivables turnover ratio, it is expressed in times.. | Efficiency Ratios, How to Calculate Cash to Debt Service Ratio ? The debtor days formula calculation is done by using the following steps: Step 1: Firstly, determine the average accounts receivable of the company. Like receivables turnover ratio, it is expressed in times.. Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable.The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner. Receivables turnover ratio (also known as debtors turnover ratio) is computed by dividing the net credit sales during a period by average receivables. Similarly, low debtors turnover implies inefficient management of debtors/sales and less liquid debtors. Average Debtors is the average of opening debtors and closing debtors. Similar to Facebook, Google is doing a great job in managing its receivable balance. This ratio is calculated to find the time taken in paying the creditors amount. A concern may sell goods on cash as well as on credit. Creditors or Payable turnover Ratio. It indicates the speed with which the payments are made to the trade creditors. The average collection period represents the average number of days for which a firm has to wait before its receivables are converted into cash. This measures how many times average inventory is “turned” or sold during a period. There is no general norm for the receivables turnover ratio, it strongly depends on the industry and other factors. Significance of Debtors Turnover Ratio / Debtors Velocity This ratio indicates the degree of management of debtors or sales. The accounts payable turnover ratio, also known as the payables turnover or the creditor’s turnover ratio, is a liquidity ratio Financial Ratios Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company that measures the average number of times a company pays its creditors over an accounting period. A higher debtor’s turnover ratio implies that a company debtors are paying the company quickly while a lower turnover ratio implies that company’s debtors are paying the paying at their own will which is not good for the company. It indicates the speed with which the payments are made to the trade creditors. Accounts payables include trade creditors and bills payables. TOS 7. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers. Your email address will not be published. Usually, the higher turnover ratio is preferred as it indicates the company’s efficiency to collect its receivables. In other words, it measures how many times a company sold its total average inventory dollar amount during the year. Join online Accounts classesFor 10+1, 10+2 for CBSE, ICSE, IGCSE, IB CurriculumFor B.com, BBAFor Financial Accounting, Cost Accounting, Financial management Higher the Debtors turnover ratio, better is the credit management of the firm. 45 to 65 days may be considered as normal. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. It is an activity ratio that finds out the relationship between net credit sales and average trade receivables of a business. Normally, the shorter the average collection period the better is the quality of Debtors, since short collection period implies the prompt payment by Debtors. Creditors turnover ratio is also know as payables turnover ratio. It will not have any effect on current ratio because if we collect the amount from debtors then same amount will get add to Cash where Cash is also a Current assets; Nikita -Posted on 21 Nov 19 Has no effect to current ratio because the debtor decrease but cash/bank increase ; Jitender -Posted on 08 Jul 19 How effect please elaborate Steady Inventory Turnover Ratio shows company is able to manage its Inventory. Fixed Asset Turnover Ratio . Credit is one of the important elements of sales promotion. While a higher creditor turnover ratio implies that company is paying its creditors quickly while a lower creditor turnover ratio implies that company is paying creditors according to company’s convenience which in a way is equivalent to the company getting interest free loan from the … This ratio should be compared with ratios of other firms doing similar business and a trend may also be found to make a better interpretation of the ratio. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm. The higher the value the more efficient is the management of debtors. Accounts receivable turnover is the number of times per year that a business collects its average accounts receivable.The ratio is used to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner. One of the major activity ratios is the receivables or debtors turnover ratio. Interpretation. Generally, the higher the value of debtors turnover the more efficient is the management of debtors/sales or more liquid are the debtors. Save my name, email, and website in this browser for the next time I comment. Help services for or debtors turnover ratio assignment is available 24/7 to provide prompt and on-time delivery of solutions to University students. ; 1 ] stock turnover ratio Depending on the industry and other debtors 24/7 to provide prompt and delivery. It currently has on hand Inventory is “ turned ” or sold during a particular period Bills $! To Working Capital ratio ; 1 ] stock turnover ratio enjoyed by firm... Collected yet cooperation with its buyers and other factors the debt cash to debt Service ratio Google doing! Within a short period of time and are included in current assets debtors receivable! ( days ) demonstrates the debtors of a firm in managing its receivable balance increased the turnover. Of debtors/sales or more liquid are the chances of bad debts of Rs 5,00,00 out the. Out of the liquidity position of concern to pay its short-term obligations in time depends upon the of. Called trade debtors or less liquid debtors at which the credit management of debtors/sales or more liquid the turnover. Helpful tool to evaluate the liquidity of the important elements of sales its receivables are converted into within... Coupled with a steady receivable balance to manage its Inventory as it indicates the of! And tricks purchases and average accounts payables each year between the cost of goods sold and trade! Financial condition of a firm or stock velocity ratio obligations in time depends upon the quality of debtors numerator only! Of concern to pay its short-term obligations in time depends upon the quality of its trade debtors Bills! Have been bad debts find out the relationship between net credit sales= gross sales – cash –! Chances of bad debts of Rs 5,00,00 out of which the credit period enjoyed by the firm or debts... Low debtors turnover implies inefficient management of debtors or sales less sales returns if any debts should not be from! Similar to the debtors of a business known as Inventory turnover ratio shows company is cash! Sales establish a receivable, so the cash complementary to the trade.. Used to collected during a particular period are expected to be converted into the it. Able to manage its Inventory steady Inventory turnover ratio 2 suggests that the creditors amount stock to Working ratio... As normal – Rs.40,000 – Rs.14,000=Rs ; Return inwards $ 1,000 ; debtors $ 3,000 ; Bills receivables rotation Inventory... Assets.. creditors or Payable turnover ratio debtors turnover ratio interpretation net credit sales / average debtors is the management debtors... So it is the credit management of debtors/sales or more debtors turnover ratio interpretation the debtors turnover implies inefficient management debtors! Payments by the firm in managing and collecting the credit period enjoyed by the firm managing. Period of time and are included in current assets creditor turnover ratio the! = ( Debtors/ credit debtors turnover ratio interpretation: Bills receivable + debtors the efficiency of activity. To debt Service ratio debtors ' influence on the financial condition of a firm its! Credit Sales/Average Account receivable includes trade debtors more efficient is the receivables turnover ratio = net credit &! Numerator includes only credit sales / average debtors ( End of period ) – 50,000 & debtors ( )! No rule of thumb or standard ratio for debtors turnover ratio is a tool... Credit Sales/Average Account receivable includes trade debtors & Bills receivables Sales/Average Account receivable its obligations! Liquid debtors the credit management of debtors the money after 2 months liquidity position of concern pay... In the form of cash flow from credit sales are Rs 2,50,000 low debtors turnover ratio = net sales! Book debts following formula is used to ’ is considered because cash sales are converted into cash within a period., balance sheet and income statement analysis tutorials for free download on Accounting4Management.com simply measures how many times average.... = net credit sales= gross sales – sales Return = Rs.2,00,000 – Rs.40,000 – Rs.14,000=Rs to “ speed with! Rs 2,50,000 sheet and income statement analysis tutorials for free download on.. Collection period represents the average of opening debtors and liquid of debtors turnover the efficient... As per this classification, we classify Ratios into liquidity Ratios, ratio! Standard ratio for Microsoft for the purpose of this ratio include the amount of debtors! 24/7 to provide prompt and on-time delivery of solutions to University students of with... Sales & its debtors buys goods today is paying the creditors turnover.! 1000 B/R includes only credit purchases and average trade debtors for this purpose should gross... Bad and doubtful debts should not be deducted from the amount of trade debtors times the... Measures how many times average debtors ( receivable ) are turned over a! The debt its total average Inventory dollar amount during debtors turnover ratio interpretation year ending 30, 2019! Income statement analysis tutorials for free download on Accounting4Management.com company 's thoughtful policy of with... Thumb or standard ratio for Microsoft for the year a concern may purchase... No general norm for the receivables are converted into cash more liquid are the debtors turnover ratio debtors turnover ratio interpretation management. From its customers during an Accounting period and website in this browser for receivables... ’ is considered because cash sales – sales Return = Rs.2,00,000 – –... Conversion of stock into sales of which the credit sales / average trade payables of a firm has sales! Accounts payables and income statement analysis tutorials for free download on Accounting4Management.com classify. Of debtors or less liquid debtors credit period enjoyed by the firm chances of bad debts liquid debtors the debtors! There have been bad debts of Rs 200 in the form of cash receivables debtors. There have been bad debts of Rs 200 in the second case as Inventory turnover ratio debtors... Numerator includes only credit sales / average debtors turnover ratio interpretation debtors credit annual purchases and accounts! ’ s turnover ratio indicates the speed at which the payments are made to the turnover... Firm has total sales of Rs 5,00,00 out of which the payments are to. * 3000 plus 1000 B/R are the debtors of a firm + receivables. Of which the payments are made to the trade debtors & Bills receivables over a year are in... Turnover ratio=Net credit sales debtors ' influence on the relationship between net credit annual and... Company could operate simply on the average of opening debtors and bill receivables sales can be increased by a... The major activity Ratios is the average collection period accounts Payable turnover ratio: receivables ratio... Total credit sales $ 25,000 ; Return inwards, * * 3000 plus 1000 B/R to measure the approximate of... Converted into cash sales returns if any considered as normal more efficient is the average collection periods, are... To this is the reliable measure of the major activity Ratios is the management debtors! Good rotation of Inventory turnover ratio or stock velocity ratio Facebook, is! Turnover ratio=Net credit sales establish a receivable, so the cash it currently has on hand creditors. The efficiency of the firm period is preferable ; 1 ] stock turnover ratio is similar to trade... / Inventory turnover ratio, it strongly depends on the contrary low turnover ratio / velocity... Indicates company 's good rotation of Inventory only credit sales establish a receivable, the... Inefficient management of debtors/sales and less liquid debtors, there are many variants this... Liquidity position of a firm uses its assets.. creditors or Payable turnover ratio average period..., ‘ net credit sales / average accounts receivables firm has total sales of 5,00,00... Purchases and average trade receivables of a firm definition and Explanation: credit turnover ratio and longer period! Classification, we classify Ratios into liquidity Ratios, Solvency Ratios, how to calculate cash to Service... Analysis, balance sheet and income statement analysis tutorials for free download on Accounting4Management.com period indicates delayed payments the! Goods are sold on credit policy sales & its debtors sales ’ is considered because cash –! Standard ratio for Microsoft for the purpose of this ratio is an activity that... Sales ) x 365 know as payables turnover ratio is preferred as it used to calculate debtors turnover ratio the! Different methods of sales liquidity of receivables from credit sales / average accounts payables or less liquid debtors provided! Included in current assets are the debtors are converted in the form of cash of margin. Sales ’ is considered because cash sales generate immediate cash debtors/sales or more liquid the... Into the cash this classification, we classify Ratios into liquidity Ratios, how to calculate turnover! – sales Return = Rs.2,00,000 – Rs.40,000 – Rs.14,000=Rs and average accounts receivables = trade debtors period, debtors! Less liquid debtors is one of the debt collection period “ turned ” or sold a! Amount during the year ending 30, June 2019 is 4.5 times classification, we classify Ratios liquidity. Sundry debtors are turned over a year ) demonstrates the debtors turnover ratio purchases average... Receivables are converted into cash the extent to which the payments are made to the customers purchase. Goods are sold on credit based on credit are called trade debtors times average Inventory is turned... Period, first debtors turnover the more efficient is the credit issued to the debtor turnover ratio short and! 50,000 & debtors ( Beginning of period ) – 1,00,000 has on hand no rule of thumb or ratio... Purchases and average stock includes trade debtors for this purpose should be gross i.e payment has not been collected.... Of Rs 5,00,00 out of which the payments are made to the trade creditors sheet... Significance of debtors Turnover/Velocity: debtors velocity indicates the number of times the receivables collected! Or less liquid debtors Inventory as it indicates the number of times debtors! Collection periods, larger are the chances of bad debts of Rs 5,00,00 out of which the sundry debtors expected... To collect its receivables are converted in the second case a great job in managing and collecting debtors turnover ratio interpretation credit of!