Page 133 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes Debtors Turnover Ratio

This ratio exhibits the speed of the collection process of the firm in collecting the overdues
amount from the debtors and against Bills receivables. The speediness is being computed through
debtors velocity from the ratio of Debtors Turnover Ratio.
Net Credit Sales Net Credit Sales
Debtors Turnover Ratio = or
Average Debtors Debtor + Bills Receivable

Notes 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

Notes 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 2010:
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

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