Ratio Analysis - Debtors Turnover Ratio

The Debtors Turnover Ratio also called as Receivables Turnover Ratio or Debtors velocity shows how quickly the credit sales are converted into the cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers.

It is calculated by the following formula:
De퐛퐭퐨퐫퐬 퐓퐮퐫퐧퐨퐯퐞퐫 퐑퐚퐭퐢퐨=(퐍퐞퐭 퐂퐫퐞퐝퐢퐭 퐒퐚퐥퐞퐬)/(퐀퐯퐞퐫퐚퐠퐞 퐃퐞퐛퐭퐨퐫퐬)
Interpretation:
Standard credit period is 30 days
If the credit period is more than 30 days it indicates that the concern is not efficient.
If the credit period is less than 30 days it indicates that the concern is efficient.
The Average Collection Period, also called as Debt Collection Period, shows how much time business takes to realize the credit sales. Simply, how long will it take to recover payments from the debtors against the credit sales?
It is calculated by dividing the number of months or days or weeks by the debtors turnover ratio.

1. MANAGEMENT ACCOUNTING Ratio Analysis By: Smt.UMA MINAJIGI REUR HEAD, DEPT. OF COMMERCE & Management Smt. V G Degree College for Women, Kalaburagi

2. MANAGEMENT ACCOUNTING Ratio Analysis Turnover ratios – 2 Debtors Turnover Ratio

3. Classification of Accounting Ratio Types of ratios are given below: Liquidity Ratios Leverage Ratio Turnover Ratio Profitability Ratio

4. Turnover Ratios or Activity Ratios or Performance Ratios Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise. The types of Turnover ratios are: – Inventory Turnover Ratio or Stock Turnover Ratio. Debtors Turnover Ratio. Creditors Turnover Ratio. Cash Turnover Ratio. Working Capital Turnover Ratio. Fixed Assets Turnover Ratio. Capital Turnover Ratio or Sales to Net Worth Ratio.

5. Debtors Turnover Ratio The Debtors Turnover Ratio  also called as  Receivables Turnover Ratio  or Debtors velocity shows how quickly the credit sales are converted into the cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers. It is calculated by the following formula: De  

6. Debtors Turnover Ratio Net Credit Sales = Total Sales – Cash Sales – Sales Returns Calculation of Average Debtors :   Interpretation: Standard credit period is 30 days If the credit period is more than 30 days it indicates that the concern is not efficient. If the credit period is less than 30 days it indicates that the concern is efficient.

7. Debtors Turnover Ratio Calculation of Average Debtors (if B/R is given):  

8. Average Collection Period The  Average Collection Period,  also called as  Debt Collection Period , shows how much time business takes to realize the credit sales. Simply, how long will it take to recover payments from the debtors against the credit sales? It is calculated by dividing the number of months or days or weeks by the debtors turnover ratio. A  

9. Average Collection Period A   A   A  

10. Average Collection Period A   A * No. of days in a year    

11. Illustration 1: From the following information calculate Debtors turnover ratio (DTR) and Average collection period (ACP). Total Sales Rs.6,40,000, Cash sales Rs. 4,00,000, Debtors at beginning Rs. 20,000, debtors at the end Rs. 28,000. Bills receivable at beginning Rs. 16,000 and B/R at the end Rs.24,000. Solution 1: Net Credit Sales = Total Sales – Cash Sales – Sales Returns Net Credit Sales = 6,40,000 – 4,00,000 – Nil Net Credit Sales = 2,40,000

12.     Total Sales Rs.6,40,000, Cash sales Rs. 4,00,000, Debtors at beginning Rs. 20,000, debtors at the end Rs. 28,000. Bills receivable at beginning Rs. 16,000 and B/R at the end Rs.24,000. = 44,000   De   De = 5.45 times  

13. A   A   A   A = 2.2 months   A = 9.54 weeks   A  

14. Illustration 2: From the following information calculate Debtors turnover ratio (DTR). Total Sales Rs.6,00,000, Cash sales Rs. 1,00,000, Debtors at beginning Rs. 20,000, debtors at the end Rs. 30,000. Solution 2: Net Credit Sales = Total Sales – Cash Sales – Sales Returns Net Credit Sales = 6,00,000 – 1,00,000 – Nil Net Credit Sales = 5,00,000

15.   = 25,000   Total Sales Rs.6,00,000, Cash sales Rs. 1,00,000, Debtors at beginning Rs. 20,000, debtors at the end Rs. 30,000. De   De = 20 times  

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