Trade Payables Turnover Ratio

Trade Payables Turnover Ratio is also known as Accounts Payable Turnover Ratio or the Creditors Turnover Ratio. This ratio is used to measure the number of times the business is paying off its creditors or suppliers in an accounting period.

Accounts payables are short term debts that a business owes to its suppliers and creditors. Trade payables turnover ratio or Accounts payable turnover ratio depicts the efficiency with which the business makes payment to the creditors.

A higher value of accounts payable turnover ratio indicates that the business is making payments to its creditors on time and the business is in good standing with the creditors and suppliers.

A decrease in the value of accounts payable turnover ratio indicates that a business is taking a longer time for making payments to its creditors than the previous periods. The decreasing frequency of payments might be a sign of financial distress for the business.

We will be discussing the formula for calculating the Accounts payable turnover ratio in the following lines.

Trade Payables Turnover Ratio Calculation

The formula for Trade payables turnover ratio or Accounts payable turnover ratio is represented as follows.

Accounts Payable Turnover Ratio = Net Credit Purchases / Average Accounts Payable

Net credit purchases can be obtained by subtracting the purchase returns from the total credit purchases made during the accounting period.

Average accounts payable is obtained by adding the value of accounts payable at the beginning and ending of an accounting period and dividing by 2.

Let us understand the calculation of accounts payable turnover ratio with a solved example.

Solved Example

New Horizon Pvt Ltd has reported annual credit purchases amounting to ₹250,000, while there were purchase returns of ₹40,000. The beginning balance of accounts payable was ₹20,000 and ending balance was ₹30,000. Find the trade payable turnover ratio.

Answer:

We know that,

Accounts Payable Turnover Ratio = Net Credit Purchases / Average Accounts Payable

Now,

Net Credit Purchases = Total Credit Purchases – Purchase Returns

= 250,000 – 40,000

= 210,000

Average Account Payable = (Beginning Account Payable + Ending Account Payable) / 2

= (20,000 + 30,000) / 2

= 50,000 /2

= 25,000

Now,

Accounts Payable Turnover Ratio = Net Credit Purchases / Average Accounts Payable

= 210,000 / 25,000

= 8.4

This implies that the suppliers were paid 8 times during the accounting period.

This concludes our article on the topic of Trade Payables Turnover Ratio, which is an important topic in Class 12 Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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