Average Payment Period

What is the Average Payment Period?

Average payment period refers to the average time period taken by an organization for paying off its dues with respect to purchases of materials that are bought on the credit basis from the suppliers of the company, and the same doesn’t necessarily have any impact on the company’s working capital.

The formula of Average Payment Period Ratio

The average Payment Period can be calculated using the below-mentioned formula.

Average Payment Period Ratio = Average Accounts Payable / (Total Credit Purchases / Days)
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For eg:
Source: Average Payment Period (wallstreetmojo.com)

Where,

Example of the Average Payment Period Ratio

Below is an example of the average payment period ratio

You can download this Average Payment Period Excel Template here – Average Payment Period Excel Template

During the accounting year 2018, Company A ltd, made the total credit purchases worth $ 1,000,000. For the accounting year 2018, the beginning balance of the accounts payable of the company was $350,000, and the ending balance of the accounts payable of the company was $390,000. Using the information, calculate the Average Payment period of the company. Consider 360 days in a year for the calculation.

Solution

  • Beginning balance of the accounts payable of the company: $350,000
  • Ending balance of the accounts payable of the company: $390,000
  • Total credit purchases during the year: $1,000,000
  • Several days in a period: 360 days.

Now in order to calculate the average payment period, firstly the Average Accounts Payable will be calculated as below:

Average Payment Period Example 1

Average Accounts Payable = (Beginning balance of the accounts payable + Ending balance of the accounts payable) / 2

  • = ($350,000 + $390,000) / 2
  • = $370,000

Calculation of the Average Payment Period

Average Payment Period Example 1.1
  • = $370,000 / ($1,000,000/ 360)
  • = $370,000 / ($1,000,000/ 360)
  • = 133.20 days

Thus the average payment period of the company for the accounting year 2018 is 133.20 days.

Advantages of Average Payment Period

Below are some of the advantages which are as follows,

Disadvantages of Average Payment Period

Below are some of the disadvantages which are as follows,

Important Points

The different important points related to the Average Payment period are as follows:

Conclusion

Average Payment Period is one of the important solvency ratios of the companySolvency Ratios Of The CompanySolvency Ratios are the ratios which are calculated to judge the financial position of the organization from a long-term solvency point of view. These ratios measure the firm’s ability to satisfy its long-term obligations and are closely tracked by investors to understand and appreciate the ability of the business to meet its long-term liabilities and help them in decision making for long-term investment of their funds in the business.read more and helps a company track and know its ability to pay the amount payable to its creditors. It also tells about the different information of the company such as the cash flow position of the company and its creditworthiness, etc., which is useful for many of the stakeholders of the company, especially the investors, creditors, management, and the analysts, etc. to make the informed decision with respect to the company.

However, its calculation only considers the financial figures and ignores the non-financial aspects such as the relationship of the company with its customers.

This article has been a guide to the Average Payment Period. Here we discuss how to calculate the average payment period ratio along with an example, advantages, and disadvantages. You can learn more about accounting from the following articles –

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