# 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
- Return on Investment (ROI) Definition
- Negative Financial Leverage Definition
- Positive Financial Leverage Definition
- Working Capital Definition
- Horizontal/Trend Analysis Definition
- Contribution Margin (CM) Ratio Definition
- Accounting Concepts
- Managerial or Management or Cost Accounting Terms and Definitions
- Weighted Average Method Definition

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