Net credit sales are credit sales less any sale returns, sales allowances and sales discounts. The amount represents the true value of the customer sale to the business.
Credit sales are sales made by a business to a customer which do not require immediate payment. Consequently cash sales are excluded from the definition. The customer has an account with the business, and will be required to pay in accordance with the credit terms at a later date.
The net credit sales formula can be stated as follows:
The formula uses the following terms.
- Sales returns represent the value of goods physically returned by the customer for whatever reason.
- Sales allowances are amounts deducted for damages, faults and defects when the goods are retained by the customer.
- Sales discounts are normally given for early payment and are based on the value of the invoice.
It is important to understand that the sales returns and sales allowances included in the formula above only relate to those associated with credit sales. Returns and allowances relating to cash sales should not be included in the calculation
How to Find Net Credit Sales
As an example of how to find net credit sales, suppose a business sells 100 items at 10 each to a customer on credit terms.
Subsequently the customer returns 20 items as faulty, and is given a sales allowance of 150 for defects on goods they keep. Furthermore the customer is also offered a 4% discount for early settlement. Accordingly to find the value of the net credit sales the formula shown above is used as follows.
Gross credit sales = 100 x 10 = 1,000 Sales returns = 20 x 10 = 200 Sales allowances = 150 Net sales before discount = 1,000 - 200 - 150 = 650 Sales discount = 650 x 4% = 26 Net credit sales = Gross sales - Returns - Allowances - Discounts = 1,000 - 200 - 150 - 26 = 624
Net credit sales is used by management as the basis for many other ratio calculations. For example accounts receivable turnover and days sales outstanding both use the value of sales made to customers on account.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.