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The average age of accounts payable is calculated much the same way as average age of accounts receivable and average age of inventory.
The result calculated is meaningful in light of the average credit terms a company's vendors extend. Credit managers like to use this as one of the ratios they use when reviewing a new customer credit application since it provides an indication of the bill paying patterns of the prospective customer.
The formula for average age of accounts payable is:
Average age of accounts payable = 365 / accounts payable turnover
Example:Home Depot - following the example calculated for accounts payable turnover:
Average age of accounts payable = 365 / 9
Average age of accounts payable = 40 days
