Debtor’s turnover ratio and creditor’s turnover ratio are the terms used in the context of accountancy, both debtors and creditors turnover ratio are types of turnover ratios. While we all know that debtors are the individuals or companies which owes the company’s money and creditors are individuals or companies to whom company owe the money, but debtors turnover ratio and creditors turnover ratio are bit different and in order to understand more about both terms one should know the difference between the debtors turnover ratio and creditors turnover ratio –
Debtors Turnover Ratio and Creditors Turnover Ratio Difference
Meaning
Debtors turnover ratio means how well a company is managing its debtors because in normal course of business company cannot sell all its products in cash and it has to give credit to its customers but important thing while giving credit is how early company can recover the money for credit sales done by the company and debtors turnover ratio measures how quickly a company is able to collect cash from its debtors. While creditors turnover ratio means how well a company is managing its creditors because in normal course of business company does not pay for all its raw material in cash and since company also takes credit from suppliers it has to pay suppliers on time, creditors turnover ratio measures the time taken by the company to pay cash to its creditors.
Formula
The formula for calculating debtor’s turnover ratio is Net credit sales/ Average accounts receivables of the company where average accounts receivables are calculated by taking an average of account receivable outstanding at the beginning and end of the year. The formula for calculating creditor’s turnover ratio is Net Credit Purchases/ Average Account Payables of the company where average account payables are calculated by taking an average of account payable outstanding at the beginning and end of the year.
Example
Example of debtors turnover ratio is when net credit sales of the company for the year is $90000 and account receivable outstanding at the beginning of the year is $20000 and account receivable outstanding at the end of year is $10000 than average receivables will be $15000 and debtors turnover ratio will be $90000/$15000 that is 6 times. Example of creditor turnover ratio is when net credit purchase of the company for the year is $80000 and account payable outstanding at the beginning of the year is $12000 and account payable outstanding at the end of year is $8000 than average payable is $10000 and creditors turnover ratio will be $80000/$1000 that is 8 times.
Interpretation
A higher debtor’s turnover ratio implies that a company debtors are paying the company quickly while a lower turnover ratio implies that company’s debtors are paying the paying at their own will which is not good for the company. While a higher creditor turnover ratio implies that company is paying its creditors quickly while a lower creditor turnover ratio implies that company is paying creditors according to company’s convenience which in a way is equivalent to the company getting interest free loan from the creditors.
Alternate Name
Debtor’s turnover ratio is also called accounts receivable turnover ratio while creditors turnover ratio is also called accounts payable turnover ratio.
As one can see from the above that both debtor’s turnover ratio and creditor’s turnover ratio are completely different from each other and that is the reason why one should look at both ratios while analyzing the financial statements of the company.