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## How to calculate days payable outstanding, formula and example?

Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more

# Meaning of Days Payable Outstanding

Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.

If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.

## Formula

The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.

Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.

## Example

ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.

 S.No. Particulars Amount 1. Average Accounts Payable 45,000 2. Cost of Goods Sold 2,25,000 3. Number of Days 30

Calculation Part-

Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold

= 45,000 * 30/2,25,000

= 6 Days

In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.

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## What is the formula for net credit sales?

Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding.  Net Credit Sales Credit sales refer to the total value of salesRead more

Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding.

# Net Credit Sales

Credit sales refer to the total value of sales which an organization (or) company makes on credit. If the company offers any discount to its customers on the credit sale of goods (or) if sales returns occur, then such amounts must be deducted from the total value of credit sales to arrive at Net credit sales figure.

In simple terms, net credit sales refer to the total revenue generated by the company when it sells goods and services to its customers on credit, reducing the amount of sales allowance and sales return from the total credit sales.

## Net Credit Sales Formula

 Net Credit Sales = Total Credit Sales – Sales Returns – Discount on Sales

Example-

Apple Inc furnishes you the following sales information. Calculate the value of Net credit sales.

 Particulars Amount Total Sales 4,50,000 Cash Sales 1,50,000 Credit Sales 3,00,000 Goods Returned by Customers 1,00,000 Sales Allowance/Discount 60,000

Net Credit Sales = Credit Sales – Sales Returns – Discount allowed on Sales

= 3,00,000 – 1,00,000 – 60,000

= 1,40,000

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## What is the formula to calculate net current assets?

Meaning of Net Current Assets In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital. The Net Current Assets can have a positive or a negative value, wherein tRead more

# Meaning of Net Current Assets

In simple terms, Net Current Assets refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can also be referred to as Net Working Capital.

The Net Current Assets can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. In case the current assets are greater than the current liabilities, the company possesses sufficient assets to pay off its indebtedness and is operating efficiently. However, a company is said to be facing financial difficulty and is not in a position to pay off its debts, when the value of net current assets is negative.

The formula is as follows:

## Difference between Net Current Assets and Current Assets

Net Current Assets refers to the difference between the total amount of current assets and the total amount of current liabilities whereas Current Assets are a subpart of Net Current Assets and refer to those assets that are expected to be utilized, depreciated or traded through the operations of a business within the same financial year.

For example, cash and cash equivalents, inventory, accounts receivable, etc are Current Assets whereas the summation of the same minus the total of current liabilities is termed as Net Current Assets which is further explained through an example given below.

Numerical Example

Calculate the Net Current Assets of ABC Ltd.

(Extract of Balance Sheet)

 PARTICULARS AMOUNT CURRENT ASSETS Cash and Cash Equivalents 2,00,000 Accounts Receivables 40,000 Stock Inventory 15,000 Marketable Securities 35,000 Prepaid Expenses 6,000 TOTAL CURRENT ASSETS 2,96,000 CURRENT LIABILITIES Accounts Payable 15,000 Accrued Expense 2,000 Unearned Revenue 20,000 Taxes Payable 40,000 Short-term Debt 10,000 Interest Payable 6,000 TOTAL CURRENT LIABILITIES 93,000

Solution:

Total current assets = 2,96,000

Total current liabilities= 93,000

Net Current Assets = Total Current Assets – Total Current Liabilities

= 2,96,000- 93,000  = 2,03,000

Key Takeaways

• Net Current Assets are also known as Net Working Capital.
• Net Current Assets is the difference between the total current assets and total current liabilities.
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## What is the formula for working capital?

Working capital = Current Assets - Current Liabilities I believe if you want to understand how the above formula works you will need to understand each part of this formula i.e you will first need to have a clear understanding about the concept of current assets and current liabilities. Current asseRead more

## Working capital = Current Assets – Current Liabilities

I believe if you want to understand how the above formula works you will need to understand each part of this formula i.e you will first need to have a clear understanding about the concept of current assets and current liabilities.

Current assets

It refers to all the assets including cash and cash equivalents which are expected to be converted within a year or within the operating cycle of an entity if such entity has an operating cycle longer than a year.

Current liabilities

It refers to all the payables or debts which an entity expects to discharge within a year or the operating cycle of such entity provided such an entity has an operating cycle longer than a year.

I understand that even though you got a rough idea of this concept you may not be confident while applying this concept hence, to relate to this concept a numerical example would be of great help.

So, I believe once you have a look at the below-mentioned example you will be in a better position to comfortably apply this formula:

Here, Working Capital = Current Assets – Current Liabilities

= Cash in Hand + Cash at Bank + Trade Receivables + Prepaid Rent –Trade Payables  –                  Outstanding Salaries

= 5,000 + 56,000 + 64,000 + 3,000 – 20,000 – 20,000

= 128,000 – 40,000

= 88,000.

It will add more value to your understanding if you also interpret the concept of Gross Working Capital and Net Working Capital.

Gross Working Capital

Gross working capital is a sum total of current assets of an entity. It includes

• Cash and Cash Equivalents
• Inventory
• Short term Investments
• Other Marketable Securities.

Net Working Capital

Now, the net working capital of an entity is nothing but the working capital of an entity. In simple terms, it is a difference between current assets and current liabilities of an entity.

Aastha Mehta

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