What is the official business definition of A/P Turnover Ratio? Well, you could go look it up in the dictionary, but let’s save you some time. The definition is: “a measure of how quickly a company collects its receivables; calculated as Accounts Payable divided by Average Accounts Receivable.” It’s usually expressed as a percentage. Why do accountants even care about this? Because if accounts payable are piling up faster than accounts receivable, then the business is paying off its creditors more slowly than it’s bringing in from customers—and that’s not a good thing. If payments to suppliers are bogging down the flow of cash from sales, then it means the business has to keep drawing from savings or loans just to survive. That doesn’t leave any room for expansion and long-term growth.
In order for an account to make sense, it needs to be kept in balance—debits and credits each need to cancel out in order for the accounts to balance with zero at the end of a given period (say, a month). The A/P turnover ratio measures how fast that happens.