Debtors Turnover Ratio Examples

Definition: Debtors turnover ratio (or Accounts receivable turnover ratio) indicates how long, on average, people take to pay a firm for their purchases. Generally the higher the ratio, the more efficient is the management of debtors.

Formula:
Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors
Or,
Debtors Turnover Ratio = Total Sales / Debtors

Example 1:
XYZ Ltd has the following data: Credit sales $52,000; Sales returns $2,000; Bills Receivables $10,000; Debtors $15,000.
Then, the debtors turnover ratio = (52,000 - 2,000) / (10,000 + 15,000) = 2 times

Example 2:
The following information relates to Emily Ltd:
Debtors at 1 January 2010: $45,000
Total sales (include cash sales of $28,000): $78,000
Debtors at 31 December 2010: $25,000
Calculate the accounts receivable turnover ratio.

Solution:
Net Credit Sales = Total sales - Cash sales = 78,000 - 28,000 = $50,000
Average Trade Receivables = (45,000 + 25,000) / 2 = $35,000
Accounts receivable turnover ratio = 50,000 / 35,000 = 1.43 times

* Next: Inventory Turnover Ratio Examples
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