Average Collection Period Ratio: Definition:
The Debtors/Receivable Turnover ratio when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio.
The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.
Formula of Average Collection Period:
Following formula is used to calculate average collection period:
(Trade Debtors × No. of Working Days) / Net Credit Sales
Credit sales $25,000; Return inwards $1,000; Debtors $3,000; Bills Receivables $1,000.
Calculate average collection period.
Average collection period can be calculated as follows:
Average Collection Period = (Trade Debtors × No. of Working Days) / Net Credit Sales
4,000* × 360** / 24,000
= 60 Days
* Debtors and bills receivables are added.
**For calculating this ratio usually the number of working days in a year are assumed to be 360.
Significance of the Ratio:
This ratio measures the quality of debtors. A short collection period implies prompt payment by debtors. It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors.
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