Page 197 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes
!
Caution Standard norm of the ratio:
Higher the ratio is better the position of the firm in collecting the overdue means the

effectiveness of the collection department and vice versa.
Debtors velocity: This is an extension of the earlier ratio to denote the effectiveness of the
collection department in terms of duration.

365 days /52 weeks /12 months
Debtors Velocity =
Debtor Turnover Ratio
!

Caution Standard norm of the ratio:
Lesser the duration shows greater the effectiveness in collecting the dues which means that
the collection department takes only minimum period for collection and vice versa.

Example: Sundaram & Co. Sells goods on cash as well as credit basis. The following
particulars are extracted from the books of accounts for the calendar 2005:

Particulars `
`
Total Gross sales 2,00,000
Cash Sales (included in above) 40,000
Sales Returns 14,000
Total Debtors 18,000
Bills Receivable 4,000
Provision for Doubtful Debts 2,000
Total Creditors 20,000
Calculate average collection period.

Solution: To find out the average collection period, first debtors turnover ratio has to computed
Net Credit Sales
Debtors Turnover Ratio =
Bills Receivable + Debtors
Net Credit Sales = Gross Sales – Cash Sales – Sales Return

= 2,00,000 – 40,000 – 14,000 = 1,46,000
1,46,000
Debtor Turnover Ratio = = 6.64 times
4,000 + 18,000
365 days 365 days
Debtors Velocity = = = 55 days
Debtors Turnover Ratio 6.64 times
11.4.3 Creditors Turnover Ratio

It shows effectiveness of the firm in making use of credit period allowed by the creditors during
the moment of credit purchase.
Credit Purchase Credit Purchase
Creditors Turnover Ratio = or
Average Creditors Bills Payable + Sundry Creditors

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