Net Credit Sales Formula
Net credit sales refer to a company’s revenue from sales made on credit (not including cash sales) after accounting for any sales returns or allowances. It is used to calculate a number of important financial metrics, such as the accounts receivable turnover ratio.
The formula for calculating net credit sales is:
Net Credit Sales = Gross Credit Sales – Sales Returns – Sales Allowances
Where:
- Gross Credit Sales refers to total sales made on credit (without taking into consideration any cash sales).
- Sales Returns are the sales which were returned by the customer for any reason (like damage, not meeting specifications, etc.).
- Sales Allowances are reductions in sales price due to minor defects that the buyer agrees to fix, negotiation of selling price etc.
This data is usually found in a company’s financial statements or can be obtained from the accounting department.
Example of the Net Credit Sales Formula
Let’s say we have a company called ABC Corp that primarily operates on credit sales. Over the course of a year, their records show:
- Gross Credit Sales: $500,000
- Sales Returns: $20,000 (products that were returned by customers)
- Sales Allowances: $10,000 (discounts given due to minor product defects or negotiated deals)
Using the formula for net credit sales:
Net Credit Sales = Gross Credit Sales – Sales Returns – Sales Allowances
We can substitute the given values:
Net Credit Sales = $500,000 – $20,000 – $10,000 = $470,000
So, ABC Corp’s net credit sales for the year amount to $470,000. This is the revenue the company has earned from credit sales after accounting for returned goods and allowances.
