Average Collection Period Example

Definition: Average Collection Period (or Average credit given) is used to calculate the average number of days that debtors take to discharge their debts.

Formula:
Average Collection Period = (Average Trade Debtors / Net Credit Sales) * No. of Days

Example 1:
If credit sales is $52,000; Sales returns $2,000; Debtors $6,000; Bills Receivables $4,000.
Then, Trade Debtors = 6,000 + 4,000 = $10,000
Net Credit Sales = 52,000 - 2,000 = $50,000
Average credit given = (10,000 / 50,000) * 365 = 73 days
This means that the average time it takes debtors to pay the firm is 73 days.

Example 2:
The following information relates to Swift plc for the year ended 31 December 2010:
Total sales (include cash sales $3,300): $9,300
Return inwards: $500
Return outwards: $885
Debtors at start of the year: $6,200
Debtors at end of the year: $4,200
Calculate the Debtors Collection Period (in days).

Solution:
Net Credit Sales = Total sales - Cash sales - Return inwards = 9,300 - 3,300 - 500 = $5,500
Average Debtors = (6,200 + 4,200) / 2 = $5,200
Debtors Collection Period = (5,200 / 5,500) * 365 = 345 days

* Next: Debtors Turnover Ratio Examples
1 comments:
Anonymous 5:11 AM

This was very helpful and completely understandable. Thanks for creating the site..