What Is Net Credit Sales?
Definition: Net credit sales refer to the amount of sales that a firm makes from its customers who pay on credit instead of cash. Likewise, it does not include sales that are paid immediately.
The NCS concept is helpful in ascertaining the total credit that a firm allows its customers minus the returns and sales allowance related to those sales. The measure is also used to determine sales outstanding as well as accounts receivable turnover.
Understanding Net Credit Sales
Net credit sales come into being when firms establish credit terms that allows customers to purchase products or services on credit. In income statements, total sales also include sales made on credit. Management relies on the net credit sale figure to track receivables and ascertain how customers are paying off their accounts. For that reason, the net credit sales figure is often used to ascertain accounts receivable turnover.
These types of sales are similar to net sales reported on the income statement as they represent a gross amount of sales minus returns, allowances and discounts. However, they differ from net sales on the payment mode used in this case. For net sales, payment is immediate, while for net credit sales payment is postponed to a future date.
Firms with loose credit policies tend to have a high amount of net credit sales. Granting large amounts of credit while a good way of fuelling sales can present lots of challenges. For starters, the failure of some customers to pay on time can plunge a firm into financial problems.
Net Credit Sales Formula Calculation
When it comes to calculating net credit sales, it is important first to ascertain gross sales. This figure represents the total dollar amount of all customer transactions that amount to sales. When calculating gross sales, ignore the source of the sale or the mode of payment.
The second step involves determining the amount of sales paid in cash. Total all-cash sales and then subtract them from gross sales. Likewise, it would be important to account for all products returned for whatever reason. Any allowances made to customers or discounts issued should also be accounted’ for and deducted as well from gross sales.
It would be much easier to calculate net credit sales by recording cash sales separately. Similarly, sales returns and sales allowances should be recorded separately.
Net credit sales = Sales on credit – Sales returns – Sales Allowances.
Consider company ABC that generated $200,000 worth of gross sales. Customers only paid $50,000 in cash. Later on, the company issued a refund for $20,000 and allowed $10,000 as an allowance for a defect product.
Net credit sales in this case would be $200,000 – $50,000 – $20,000 – $10,000 = $120,000
Net Credit Sales Importance
It is important to calculate net credit sales as a way of knowing how much potential income a business has in the hands of customers. Such calculations also help in the determination of the cash-to-credit ratio for customers. The calculation also helps in keeping track of aging accounts.
In the case of aging accounts, a firm may start to pursue payments for goods and services sold on credit aggressively as a way of transitioning them into net sales. Likewise, this might be the time for a business to consider offering discounts to customers as a way of motivating them to pay for goods and services bought on credit.
Summary
Net credit sales refer to the net sales that a firm generates on customers purchasing goods or services on credit. Similarly, it helps provide a break up of values, consequently providing an accurate picture of the amount that can be realized during a particular period.
Accumulation of too much net credit sale may lead to additional debt, consequently creating problems. It is, therefore, important to regulate sales made on credit, as a way of curbing accumulation of bad debts.