What are Net Credit Sales?
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.
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.
The net credit sales formula can be used to calculate net credit sales 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, then the gross credit sales are 10 x 100 = 1,000.
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:
Net credit sales = Credit sales – Sales returns – Sales allowances – Sales discounts
Net credit sales = 1,000 – 20 x 10 – 150 – 4% x (650) = 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.
For further information see the Wikipedia definition.
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