What is the Debtors Turnover Ratio? (Receivables Turnover)

When a business sells goods on credit, the customers who owe the business money are called 'Debtors' (or Trade Receivables). The Debtors Turnover Ratio is a critical accounting metric used to check how quickly and efficiently a company collects cash from these customers.

Question (Click to Flip)

What is the opposite of Debtors Turnover Ratio?

Answer

The Creditors Turnover Ratio (Trade Payables Turnover). It measures how quickly a company pays off its own suppliers for raw materials bought on credit.

Card 1 of 1 free previews

Key Facts

This ratio is part of the 'Activity Ratios' or 'Efficiency Ratios' in Class 12 Accountancy.

If the problem does not provide Opening and Closing Debtors separately, you can just use the Closing Debtors figure as the denominator.

1. What does the Ratio indicate?

The ratio indicates the number of times, on average, a company collects its average trade receivables (debtors) during a year.

A High Ratio is good. It means the company collects its cash quickly from customers, indicating strong cash flow and good credit policies.
A Low Ratio is bad. It means cash is stuck with customers for too long, increasing the risk of bad debts (customers not paying).

2. The Formula

Debtors Turnover Ratio = $\frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}}$

Net Credit Sales: Total Credit Sales minus Sales Returns. (Do not include Cash Sales).
Average Trade Receivables: $\frac{(\text{Opening Debtors} + \text{Closing Debtors})}{2}$. (Trade receivables also include Bills Receivable).

3. Average Collection Period

Once you find the ratio, you can calculate the exact number of days it takes the company to collect cash. Average Collection Period = $\frac{365 \text{ days}}{\text{Debtors Turnover Ratio}}$

For example, if the ratio is 6, the collection period is $365/6 = 60.8$ days. This means it takes the company about 61 days to get money from its buyers.

Questions and Answers

What is the opposite of Debtors Turnover Ratio?+

The Creditors Turnover Ratio (Trade Payables Turnover). It measures how quickly a company pays off its own suppliers for raw materials bought on credit.

More in Commerce

💼

Profit Volume Ratio (P/V Ratio) — Formula and Examples

The Profit Volume (P/V) ratio shows the relationship between contribution and sales. Learn its formula, calculation, uses and how it helps find the break-even point.

💼

P/V Ratio (Profit Volume Ratio) Formula

Learn the PV Ratio (Profit Volume Ratio) formula. Understand its significance in marginal costing, break-even analysis, and calculating profit.

💼

Difference Between Recruitment and Selection

Learn the core difference between Recruitment (encouraging candidates to apply) and Selection (choosing the best candidate) in Business Studies.

💼

What is Residential Status in Income Tax?

Understand the meaning of Residential Status in the Indian Income Tax Act. Learn how it determines whether an NRI or a Resident pays tax on global income.

💼

Rights of an Unpaid Seller — Under the Sale of Goods Act

An unpaid seller has rights against the goods (lien, stoppage in transit, resale) and against the buyer (suit for price and damages). Learn all rights with meaning.

Study Smarter with Shinyu.ai

Turn this guide into revision flashcards, a practice exam, or an AI-generated podcast — free, no signup required.