# Average Collection Period Ratio: Definition

# Average Collection Period Ratio: Definition**:**

The Debtors/Receivable Turnover ratio when calculated in terms of days is known as **Average Collection Period** or **Debtors Collection Period Ratio**.

The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.

## Formula of Average Collection Period:

Following formula is used to calculate average collection period:

(Trade Debtors × No. of Working Days) / Net Credit Sales

## Example:

Credit sales $25,000; Return inwards $1,000; Debtors $3,000; Bills Receivables $1,000.

**Calculate average collection period.**

### Calculation:

Average collection period can be calculated as follows:

Average Collection Period = (Trade Debtors × No. of Working Days) / Net Credit Sales

4,000* × 360** / 24,000

= 60 Days

* Debtors and bills receivables are added.

**For calculating this ratio usually the number of working days in a year are assumed to be 360.

## Significance of the Ratio:

This ratio measures the quality of debtors. A short collection period implies prompt payment by debtors. It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors.

### You may also be interested in other articles from “financial statement analysis” chapter:

- Horizontal and Vertical Analysis
- Ratios Analysis
- Horizontal Analysis or Trend Analysis
- Trend Percentage
- Vertical Analysis
- Accounting Ratios Definition, Advantages, Classification and Limitations:
- Gross profit ratio
- Net profit ratio
- Operating ratio
- Expense ratio
- Return on shareholders investment or net worth
- Return on equity capital
- Return on capital employed (ROCE) Ratio
- Dividend yield ratio
- Dividend payout ratio
- Earnings Per Share (EPS) Ratio
- Price earning ratio
- Current ratio
- Liquid/Acid test/Quick ratio
- Inventory/Stock turnover ratio
- Debtors/Receivables turnover ratio
- Average collection period
- Creditors/Payable turnover ratio
- Working capital turnover ratio
- Fixed assets turnover ratio
- Over and under trading
- Debt-to-equity ratio
- Proprietary or Equity ratio
- Ratio of fixed assets to shareholders funds
- Ratio of current assets to shareholders funds
- Interest coverage ratio
- Capital gearing ratio
- Over and under capitalization
- Financial-Accounting- Ratios Formulas
- Limitations of Financial Statement Analysis

### Other Related Accounting Articles:

- Earnings Per Share (EPS) Ratio
- Accounts Receivable Collection Period
- Return on Capital Employed
- Inventory Conversion Period
- Liquidity Index
- Accounts Payable Days
- Tangible Common Equity
- Cost of Credit
- How to Calculate Average Accounts Payable
- Appraisal Capital Explained

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Dear sir/madam,

Example given for formula used to calculate average collection period is clear. I would like to know if debtors balance given is opening and closing balance for debtors. Is it we need to average the balance for debtors which is (opening balance of debtors + closing balance of debtors) / 2.

Thank you with best regards.

Mr Chan

25/4/2014