The point which should be remembered while calculation of the Debtors Turnover Ratio is that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected.
If the information about opening and closing balances of trade debtors and credit sales is not available, then the debtor’s turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given.
Debtors turnover ratio= Sales/ Average Receivables
Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors
= 48,000 / 6,000
= 8 Times
Significance of the Ratio:
Velocity Ratio or debtor’s turnover ratio indicates the number of times the debtors are turned over a year i.e. cash is collected by the debtors. The higher the value of debtor’s turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors.