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. It is the reliable measure of the time of cash flow from credit sales. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. The accounts receivables turnover ratio measures the number of times a company collects its average accounts receivable balance. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. * 25000 less 1000 return inwards, ** 3000 plus 1000 B/R Significance of the Ratio:Īccounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. and formula can be written as follows.ĭebtors Turnover Ratio = Total Sales / DebtorsĬredit sales $25,000 Return inwards $1,000 Debtors $3,000 Bills Receivables $1,000.Ĭalculate debtors turnover ratio Calculation:ĭebtors Turnover Ratio = Net Credit Sales / Average Trade Debtors 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. It is calculated by dividing the net credit sales by the average accounts receivable. In addition, it determines how often a company can manage the average accounts receivable over a particular period. 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. Recommended Articles Key Takeaways The accounts receivable turnover ratio shows the business efficiency of gathering credit from the debtors. The average receivables are found by adding the opening receivables and closing balance of receivables and dividing the total by two. The trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills Receivables. The two basic components of accounts receivable turnover ratio are net credit annual sales and average trade debtors.
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