As mentioned earlier, gross sales are the total goods and services sold to your customers during a specific period of time. As per the accrual system of accounting gross sales are the total dollar amount of invoices you send 4 tips on how to categorize expenses for small business to your customers to request payment. As mentioned earlier, net sales are nothing but gross sales less sales returns, allowances, and discounts. This figure is important for various stakeholders such as investors and owners.

This means that net credit sales do not include any sales made on cash. Furthermore, net credit sales also take into account sales return and sales allowances. Additionally, a low ratio can indicate that the company is extending its credit policy for too long. It can sometimes be seen in earnings management, where managers offer a very long credit policy to generate additional sales.

Accounts Receivable Turnover Ratio Formula

The measure is also used to determine sales outstanding as well as accounts receivable turnover. Credit sales are the sales transactions for which the payment will be made at a later date. According to Corporate Finance Institute, credit sales allow customers to purchase products or services though they don’t have sufficient cash at the time of making the transaction. The annual credit sales refer to the total invoiced account receivables for the 12-month financial period.

• Net credit sales are shown in the Balance Sheet in the “Current Assets” section under the head “Trade Receivables”.
• You do not have to wait for the cash payment to recognise sales in your books of accounts.
• Further, these goods must be returned within a few days immediately after they are sold.
• Similarly, sales returns and sales allowances should be recorded separately.

It is easiest to calculate net credit sales when cash sales are recorded separately in the accounting records from sales on credit. Also, sales returns and sales allowances should be recorded in separate accounts (or at least aggregated into a separate account). This accounting item is used to calculate various other financial analysis items like days sales outstanding and accounts receivable turnover ratio.

Net Credit Sales Formula Calculation

These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy. This should not be confused with write-offs because the latter is recorded as an expense that reduces the asset value and is done before any sale is made. Net Sales are part of an Income Statement account that most users and the management monitor regularly to gauge the company’s economic status. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

The company received $1M of product returns, and provided allowances of $500K. It is not always the case that lower net credit purchases – which relates to a lower accounts payable turnover ratio – is a sign of poor debtor practices by the firm. This means your total business revenues may reduce on account of returns, discounts, and allowances. Therefore, you need to adjust such items to compute net sales for your business. When it comes to calculating net credit sales, it is important first to ascertain gross sales.

How to Calculate Net Sales Revenue

Remember, gross margin is an important figure that investors and other stakeholders keep a track of. This is because gross margin indicates the part of each dollar of revenue that your business retains as gross profit. In addition to this, the manner and the time at which sales are recorded depends on your accounting and bookkeeping system.

The Net Sales of your business are typically reported in the income statement. Your income statement showcases the total expenses of your business in the form of three different categories. These include direct expenses, indirect expenses, and capital expenses. The amount allowed for trade discounts indicates the disparity between the standard price and the actual price that consumers pay you. Remember, the trade discount allowance reduces your total sales to represent the actual price that your consumers pay. Your income statement showcases the financial progress of your business during a specific period.