What are Net Credit Sales?
Net credit sales are credit sales less any sale returns, sales allowances and sales discounts, and represent 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. 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:
In the formula the following meanings are used:
- Sales returns represent the value of goods physically returned by the customer for whatever reason.
- Sales allowances are given when the goods are retained by the customer, but an amount is deducted for damages, faults and defects.
- Sales discounts are normally given for early payment and are based on the value of the invoice.
How to Calculate Net Credit Sales
As an example of how to find net credit sales, if a business sells 100 items at 10 each to a customer on credit terms.
If the customer returns 20 items as faulty, is given a sales allowance for defects of 150 on the goods they keep, and is offered 4% discount for early settlement, then the net credit sales is given by:
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 as the basis for many ratio calculations, an example of which can be seen in our accounts receivable turnover calculator.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. 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 BSc from Loughborough University.