What are Net Credit Sales?
Net Credit Sales Definition
Net credit sales, often just stated to as “credit sales,” represent the total revenue generated by a business from selling goods or services to customers on credit.
In other words, it’s the amount of money a business expects to receive from customers for goods or services sold on credit, typically over a specific period.
Net Credit Sales Formula
Net credit sales can be calculated by using the following formula:
Net Credit Sales = Total Credit Sales – Returns – Sales Discounts
How to Calculate Net Credit Sales
Now that we know what the formula is, next we need to know how to find net credit sales by following these steps:
- Determine Total Sales
Begin by finding the total credit sales revenue generated during the accounting period.
These are any purchases where the payment is not received up front for the goods or services.
- Subtract Returns
Deduct any returns from the total sales.
Returns are products or services that customers send back to the business and receive their money back for the purchase, for example if the product is faulty.
- Deduct Sales Discounts
If the business offered any sales discounts to encourage early payments, subtract these discounts from the remaining total.
Examples of Net Credit Sales Calculation
To further illustrate the concept of net credit sales, let’s look at an example calculation:
XYZ Fashion Ltd, a consumer clothing retailer, had total annual credit sales of £300,000.
They experienced £20,000 in returns and offered £70,000 in sales discounts.
Net Credit Sales = Total Credit Sales – Returns – Sales Discounts
Net Credit Sales = £300,000 – £20,000 – £70,000
So, XYZ Fashion’s net credit sales for the year amount to £210,000.
Interpreting Net Credit Sales
Now that we have calculated net credit sales, let’s discuss how to interpret the results:
Positive Net Credit Sales
A positive value indicates that the business is efficiently selling its products or services on credit.
The higher the positive net credit sales, the more revenue the company is expecting from credit sales.
Negative Net Credit Sales
A negative value suggests that the company is issuing more credit refunds or discounts than it is earning through credit sales.
This can be a red flag and may require a closer look into the company’s credit policies and customer base.
Zero Net Credit Sales
If net credit sales are zero, it means that the company’s credit sales exactly offset the returns and discounts.
The business may have made credit sales, but these were effectively cancelled out by returns or discounts.
A zero net credit sales figure should prompt further investigation to understand the reasons behind it.
It may be an indication of operational problems, customer satisfaction issues, strategic decisions, or accounting irregularities.
Where to Find Net Credit Sales on Financial Statements
Net credit sales can typically be found on a business’s income statement, balance sheet and cash flow statement.
Income Statement
Net credit sales on the income statement, can typically be found within the revenue or sales section.
Some annual reports may have a dedicated line item labelled “Net Credit Sales,” making it easy to identify.
However, in cases where this specific line item is absent, manual calculation would be required using the formula and steps above.
Balance Sheet
Net credit sales on the balance sheet can be found on the “short-term assets” section under accounts receivable.
It represents the money that the business expects to receive in the future, which is why it is considered an asset on the balance sheet until it is collected.
Cash Flow Statement
Net credit sales also have an impact on the cash flow statement, particularly when customers make payments to settle their credit balances.
As the cash flow statement shows the movement of cash into and out of the business, when customers make payments for their credit purchases, this results in a positive cash inflow.
This is an important indicator of a business’s liquidity and its ability to convert credit sales into cash.