Accounts Payable Turnover Ratio

Accounts Payable Turnover Ratio is a type of Turnover Ratio that determines the efficiency with which a business is paying to its suppliers. In other words, this ration tells how good a company is in payable the payable or money owed by it. Accounts Payable Turnover Ratio is also known as Trade Payable Turnover Ratio or Creditor’s Turnover Ratio.
Where,
Net Credit Purchases = Total Purchase During the Period (Excluding Returns, and Purchases for which payment is made in Cash)

Significance and Interpretation

Accounts Payable Turnover Ratio tells the number of times the payables are paid off over a period.
  • High Accounts Payable Turnover Ratio indicates the company is paying off its payables fast over a period, it is desirable to have a high value of this ratio.
  • Low Accounts Payable Turnover Ratio indicates that the company is not able to pay its payables properly. Low values of this ratio are not desirable/healthy for a company.
  • It must be noted that while comparing two companies on the grounds of Accounts Payable Turnover Ratio, they should be of the same industry.

Examples

Example 1: 

Use the following data of ABC Ltd, to calculate its Accounts Payable Turnover Ratio.
  • Total Purchase during FY = Rs. 1500000.00
  • Purchases return during the FY = 2% of Total Purchase
  • Purchases in Cash = 15% of Total Purchase
  • Accounts payable at the Beginning of FY = Rs 170000.00
  • Accounts Payable at the End of FY = Rs 430000.00 

Solution:

Net Credit Purchase = Total Purchase – Purchase Returns – Purchase in Cash
 (1500000 – 30000 – 225000)
 Rs. 1245000.00
Average Accounts Payable = (430000 + 170000) / 2
⇨ Rs. 300000.00
Accounts Payable Turnover Ratio = Net Credit Purchases / Average Accounts Payable
⇨ 1245000 / 300000 = 4.15
Hence, Accounts Receivable Turnover Ratio = 4.15
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