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

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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