Creditors or Payable turnover Ratio | Formula | Significance

Creditors or Payable turnover Ratio

A business concern may not purchase its all items on cash basis. Sometimes, there may be credit purchase. This ratio is calculated to find the time taken in paying the creditors amount. It is very similar to Debtors / Inventory Turnover Ratio. This ratio is otherwise called as creditors velocity.

Formula to find Creditors or Payable turnover Ratio

The following formula is used to calculate creditors / payable turnover ratio.

Creditors / Payable Turnover Ratio (or) Creditors Velocity = Net Credit Annual Purchases / Average Trade Creditors

Trade Creditors = Sundry Creditors + Bills Payable

Average Trade Creditors = (Opening Trade Creditors + Closing Trade Creditors) / 2

Net Credit Annual Purchases = Gross Purchases – Cash purchase – Purchase Returns

Note: If credit purchase information is not available, total purchase can be used for calculation. If opening trade creditors information is not available, closing trade creditors can be used for calculation.

Percentage of Net Purchases to Payable = Net Purchases / Payable x 100

Percentage of Payable to Net Purchase = Payable / Net Purchases x 100

Average Payment Period Ratio (or) Average Age of Payable = Average Trade Creditors / Net Credit Purchase per day or Per week or per month

Net Credit Purchase per day or per week or per month =  Net Credit Purchase for the period / No. of days or weeks or months in the period

Average payment period =  Trade Creditors x No. of Working Days / Annual Net Purchases


Average payment period = No. of Working Days / Creditors Turnover Ratio

Significance of Average Payment Period Ratio

This ratio indicates the degree of efficiency of management in paying creditors amount. Generally, lower the ratio, the liquidity of the business concern is in better position and vice versa. In other words, higher the ratio, the company enjoys the credit period allowed by the suppliers and the amount may be used for some other productive purpose. At the same time, the higher ratio may also imply lesser discount facilities availed or higher prices paid for the goods purchased on credit.

Leave a Reply

Recent Posts

Recent Comments

Related pages

socialism mixed economycalculate leverage ratiosimilarities of cost accounting and financial accountingwhat is marginal costing in cost accountingwhat are the essential elements of a valid contractventure capitalist meaningcentralized and decentralized purchasingdemerits of advertisingadvantages of zero based budgetingmultistage cluster random samplingultra vires meansinternational capital budgeting techniquescreditors turnover ratio formulafunctions of middlemenecommerce and ebusiness differenceeconomics dumpinghow to calculate debtors collection periodsinking fund on balance sheettransactional marketing vs relationship marketingreceivables to sales ratioaccounts payable turnoverwhat is the meaning of precautiondeductive inductive approachterminal digit filing medical recordssecuritization originatorincome statement proformabuying a franchise advantages and disadvantagesmbo in managementprimary markets and secondary marketswhat is meant by insurable interestfactor calculator with stepsfactors affecting pricing decisions in marketingmeaning of demeritsapplication of marginal costingtypewriter typesadvantages and disadvantages of decentralisationinternational development association idademerits of caste systemsales promotion defhundi paymentwhat is sundry creditorsadvantages of online retailingwhat is idle time in cost accountingbranding strategy meaningaverage debt collection periodcauses of demotionsinking fund provisionsvoucher auditifciqualities of good salesmanbailor and baileeadvantages of retained earningsstandard costing systemwhat is autocratic leadership in businessservicescape definitiondisadvantages to e-commercecore product augmented productbatch costingdisadvantages of autocratic leadershipmeaning of mercantile lawcentralization and decentralization in organizationadvantages and disadvantages of opening a franchisecustomer segmentation insuranceessential elements of valid contract in business lawpetty cash definition in accountingrole of venture capitalistsselling shares advantages and disadvantagesmercantile law notesdefinition of authoritarian leadershipadvantages of informal organizationangel financing definitioninsurance perilslein meaningnsdl contact listcaveat emptor lawprobability sampling advantages and disadvantagescentralized vs decentralized purchasing