What are net credit sales?

Net credit sales are those revenues generated by an entity that it allowed to customers on credit, less all sales returns and sales allowances. Key definitions are:

• Sales returns. A credit issued to a customer, caused by a problem with a shipment or service provided to that customer.
• Sales allowances. A reduction in the price charged to a customer, due to a problem with the sale transaction not involving the delivered goods or service.

Thus, net credit sales do not include sales made in exchange for the immediate payment of cash.

Net Credit Sales Formula

The formula for net credit sales is:

Sales on credit - Sales returns - Sales allowances

It is easiest to calculate net credit sales when cash sales are recorded separately from sales on credit. Also, sales returns and sales allowances should be recorded in separate accounts.

Net Credit Sales Example

For example, the Anderson Boat Company (ABC) generated $100,000 of gross sales in its most recent month. Of this amount, customers paid $20,000 in cash for new boats. During the month, ABC issued a refund of $5,000 to a customer who returned a boat, and also granted a sales allowance of $1,000 to a customer in exchange for not returning a boat having a faulty paint job. Therefore, ABC's net credit sales were $74,000 ($100,000 gross sales - $20,000 cash sales - $5,000 sales returns - $1,000 sales allowances).

Related Topics

Revenue recognition criteria
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What is unearned revenue?
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