What are Net Credit Sales?

Net Credit Sales refers to the revenue generated by a company when it sells its goods or services to its customers on credit, less all the sales returns and sales allowances.

Net Credit Sales Formula

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  • Sales Returns – It refers to the credit that gets issued to a customer due to any problem which is usually caused by shipment or service provided to that particular customer.Sales Allowances – It generally refers to the reduction in price that gets charged to a customer, which is usually due to a problem with the sale transaction which does not involve the goods or the service being delivered.

Example

John and co happened to sell goods worth $50000, of which they collected cash worth $25000. They also accepted a sales return from a customer who received faulty goods worth $2000 and granted another customer a sales allowance of $500. Calculate the total net credit sales for John and Co.

  • =25000-2000-500= 22500

Hence if one were to consider the sales allowance and the sales returns, the final net credit sales would finally stand at $22500.

Advantages

Disadvantages

Given below are some of the disadvantages-

  • Delay in Collection: There may be times when certain addition of additional debt through net credit sales may create collection problems for a firm. The debtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion.
  • read more may not give the necessary amount in time, thereby affecting the liquidity of a company, and this is certainly not a good sign for the company.Additional Expenses: The amount being forfeited due to sales returns given for a default in service terms or a faulty product tends to be unnecessary expenses for the firm, and the same could have been possibly avoided if there were necessary scrutiny and due diligence in place.Creation of Bad Debts:  As indicated earlier, if the receivables are not collected in time, it may lead to the creation of certain bad debts, which may be an additional burden and expense for the company. There may be a requirement for certain provisions that have to be set up to tackle the issues that cause liquidity concerns for the management.

Conclusion

Net credit sales, the total of credit sales that is arrived at after considering the impact and deducting sales returns and sales allowances, form an important part of ratio analysis as it becomes a part of the numerator facilitating the calculation of receivables turnover ratio. Moreover, it helps the management to gauge and measure the total receivables it is owed and thereby keep a check on the same so that there is no pressure of additional liquidity crunch created owing to such measures.

However, if the net credit sales are unchecked, they may accumulate into a phenomenal amount of receivables. It may then become a significant burden to the company as it may create bad debt problems. Certain provisions may be required for such bad debts, which are unnecessary expenses for the company. The debtorsDebtorsDebtors refer to the party to whom the goods are supplied or sold on credit by another party and the former owes money to the latter, whereas, a creditor is a party that supplies the product or services to another party on credit and has to receive the money from the latter.read more may not pay on time, and this may go on to have a huge toll on the company.

It may no doubt facilitate break-up and provide a greater understanding of information by providing ratio analysis and serving as a pre-check to help the management plan out its working capital managementWorking Capital ManagementWorking Capital Management refers to the management of the capital that the company requires for financing its daily business operations. It is important for the company in order to maximize its operational efficiency, manage its short term liabilities and assets properly, avoiding the underutilization of the resources and avoiding the overtrading, etc.read more. Hence it becomes imperative and necessary for the company to have an excellent method of checks and balances in place so that the attention towards managing liquidity by having a good look at receivables does not go unattended.

This article has been a guide to what net credit sales are and their definition. Here we discuss the formula to calculate net credit sales along with an example, advantages, and disadvantages. You can learn more from the following articles –

  • Turnover Ratio FormulaMeaning of Gross SalesFormula of Gross SalesNet Sales Formula