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The formula for payable turnover is
Payable turnover = Cost of sales/Average payable
And the result will be interpreted as the number of times I've paid my creditors, right? For example, if I bought goods of $100 mil (on credit) and on average, my accounts payable were $20 mil, then my payable turnover would be 5. Conventionally, this means that during the period, I've paid my creditors five times. But when we break the formula down for the first accounting period, something strange emerges (at least for me).
Assuming it was the first accounting period, and I had no payable balance brought down (i.e. my opening accounts payable were zero). If I bought goods of $100 mil (again, on credit), and I never paid my creditors during the period, my average inventory would be ($0 + $100 mil)/2 = $50 mil. My payable turnover would then be 2. Using the conventional interpretation, it means that I've paid my creditors twice during the year. But in reality, I've never paid my creditors. Even if we substitute average payable in the formula with closing payable ($100 mil), we still end up with a payable turnover of 1, which still doesn't conform with reality!
Can someone enlighten me on this?
Payable turnover = Cost of sales/Average payable
And the result will be interpreted as the number of times I've paid my creditors, right? For example, if I bought goods of $100 mil (on credit) and on average, my accounts payable were $20 mil, then my payable turnover would be 5. Conventionally, this means that during the period, I've paid my creditors five times. But when we break the formula down for the first accounting period, something strange emerges (at least for me).
Assuming it was the first accounting period, and I had no payable balance brought down (i.e. my opening accounts payable were zero). If I bought goods of $100 mil (again, on credit), and I never paid my creditors during the period, my average inventory would be ($0 + $100 mil)/2 = $50 mil. My payable turnover would then be 2. Using the conventional interpretation, it means that I've paid my creditors twice during the year. But in reality, I've never paid my creditors. Even if we substitute average payable in the formula with closing payable ($100 mil), we still end up with a payable turnover of 1, which still doesn't conform with reality!
Can someone enlighten me on this?