## Definition:

Accounts Payable Turnover Ratio is one of the Financial Ratios that use to assess the liquidity problem of the company by using the relationship between Total Suppliers Purchases or Credit Purchases during the period compare to Average Account Payable.

If the ratio is falling from period to period, that mean Accounts Payable Outstanding or Average Accounts Payable are increasing from period to period as well.

Increasing account payable from period to period can imply that the company might have financial difficulty and that is why we said this ratio measure liquidity problem of the company. Yet, there are many more reasons that effect this ratio and we will explain this in detail in this article.

In this article, we will explain you the basis understanding of Accounts Payable Turnover, along with formula explanation. Example and analysis will let you deeply understand about this ratio.

Now, let move to the formula so that you can get better understanding

## Formula:

Accounts Payable Turnover is calculate by Total Suppliers Purchases / Average Accounts Payable

Or The two main importance elements in calculation this ratio is Total Suppliers Purchase and Averages Account Payable.

• Total Suppliers Purchase is the total purchases on credit for the period. Mostly in twelve months. This amount is excluding the total purchase on cash payment.
• Average Accounts Payable is quite simple. It is the average account payable for the period. In other words, the average between beginning and ending accounts payable.

Now, let move to the example so that we can get better understanding.

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## Example

ABC Company operating in the cloths manufacturing industry. The total purchase on credit of ABC during the period is 5,500,000 USD. The outstanding account payable at the end of 2014 and 2015 is 500,000 USD and 400,000 USD respectively.

Calculate Accounts Payable Turnover of ABC company?