# 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.
$$Accounts\quad Payable\quad Turnover\quad Ratio=$$$$\frac { Net\quad Credit\quad Purchases }{ Average\quad Accounts\quad Payable }$$

Where,
Net Credit Purchases = Total Purchase During the Period (Excluding Returns, and Purchases for which payment is made in Cash)
$$Avg.\quad Accounts\quad Payable=$$$$\frac { Opening\quad Creditors+Closing\quad Creditors }{ 2 }$$

## 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
$$Avg.\quad Accounts\quad Payable=$$$$\frac { Opening\quad Creditors+Closing\quad Creditors }{ 2 }$$
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

#### About me

My name is Ramandeep Singh. I authored the Quantitative Aptitude Made Easy book. I have been providing online courses and free study material for RBI Grade B, NABARD Grade A, SEBI Grade A and Specialist Officer exams since 2013.

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