Blogger Random - Recent - Specific Label Posts Widget - All in One Post Feed Widget

Debtor Turnover Ratio

>> November 14, 2011

Meaning Debtor Turnover ratio

Debtor turnover ratio is the relationship between net sales and average debtors. It is also called account receivable turnover ratio because we debtor and bill receivables' total is used for following formula

= Net Credit Sales / Average Debtors ( sundry debtors + bill receivables)

Average Debtors = Opening balance of debtors + closing balance of debtors / 2

Net Credit Sales = Total sales - sales return - cash sales

If net credit sales is $50000 and average debtors are $ 10000, then debtor turnover ratio is 5 times. It means, net sales is 5 times of total debtors. We issue new stock for sale which is 5 times of its debtors. It means, our average debtors 5 times are converted into cash. We collected cash from our debtors and then we sell the more goods.

Interpretation of Debtor Turnover Ratio

1. Higher debtor turnover ratio is good because more higher debtor turnover ratio means, more fastly, we are collecting money. Suppose, in above example, we have only one debtor Mr. Alfred. We sold $ 50000 goods 5 times. It means, we are collecting money from Alfred 5 times. More times, we collect money from Mr. Alfred, our liquidity position will become more strong.

2. Lower debtor turnover ratio is not good because it tells us that we have not manage debtors better ways. Money from debtors are not collected fastly.

If we calculate average collection period on the basis of debtor turnover ratio, we can analyze our debtors more deeply.

Related : Working Capital Turnover Ratio

You might like:

Follow Us


Post a Comment

About Accounting Education

An educational site with 2500+ articles, solutions, video-guides and tutorials on all topics related to accounting and finance.

Get Update on Mobile

Type in your mobile phone web browser for free access anytime, from any place.The content is designed specifically for cell phones and mobile devices.

Contact Us

Email :

Phone : +91-8557888436

Send an Email
Phone number and vCard
LinkedIn profile
Follow us on twitter