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)
$$Avg.\quad Accounts\quad Payable=$$$$\frac { Opening\quad Creditors+Closing\quad Creditors }{ 2 } $$
$$Accounts\quad Payable\quad Turnover\quad Ratio=$$$$\frac { Net\quad Credit\quad Purchases }{ Average\quad Accounts\quad Payable } $$
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
