Net Credit Sales is the revenue a business earns through customer sales on credit, subtracting out allowances and returns. It is important to note that net credit sales does not take into consideration the sales that were paid with cash; it is takes into account credit transactions. Credit sales can be found on the balance sheet under short-term assets.
Net Credit Sales =
Sales on Credit - Allowances - Returns
There are several accounting ratios that take net credit sales into consideration, for example Days' Sales Outstanding (DSO) and Accounts Receivable Turnover. These metrics evaluate how much credit a business is providing customers, how well the business collects debt, and these measures can provide insight on a company's credit policy. Credit policy refers to the terms a business offers (i.e. N30, net 30 day payment terms) and the process the company maintains to evaluate whether or not it will offer credit to a customer.
Allowances are the result of a reduction in the sales price due to issues that occurred in the transaction, such as good that weren't delivered, or damaged goods. Returns occur when the customer isn't satisfied with the goods received or there was some other issue where the transaction must be backed out. Accountants will need to be aware that some returns may be applied with credit, when the original sale was paid with cash. This can complicate the process of coming up with accurate values. From an accounting perspective it is important to have separate accounts to record sales from credit, sales from cash, returns, and allowances.
Net Credit Sales Formula
Net Credit Sales =
Sales on Credit - Allowances - Returns
Net Credit Sales In Accounting
There are several accounting ratios that take net credit sales into consideration, for example Days' Sales Outstanding (DSO) and Accounts Receivable Turnover. These metrics evaluate how much credit a business is providing customers, how well the business collects debt, and these measures can provide insight on a company's credit policy. Credit policy refers to the terms a business offers (i.e. N30, net 30 day payment terms) and the process the company maintains to evaluate whether or not it will offer credit to a customer.
When credit sales are high, it can be an indication that the business has a "loose" credit policy and allows many customers to buy on credit. A loose credit policy can indicate that the business too freely offers credit sales and it may need to implement more stringent requirements. It is important that a business find a balance with cash and credit sales, as this impacts cash flows. Also, keep in mind that different industries have different norms, or standards. So while one industry may have a tendency to maintain high credit sales, others may not.