Net Sales on Credit
The financial accounting term net sales on credit is used to describe a measure of revenues that involves the use of credit by customers. Net sales on credit can be a useful measure to determine the effectiveness of the company’s collection policy as well as the exposure of a company to credit sales.
Net Sales on Credit = Revenues – Cash Sales – Allowance for Doubtful Accounts
The revenues (sales) of a company represent the price charged to customers for good sold, or services rendered. When a customer makes a purchase using credit, cash has not yet been received for the item. Revenues increase to reflect the sale of the goods or services, but the transaction also increases the balance of accounts receivable appearing on the balance sheet.
The net sales on credit is the difference between the accounts receivable balance and the company’s allowance for doubtful accounts. Also referred to as a contra-asset, the allowance for doubtful accounts represents the value of the credit sales the company does not expect to collect from customers.
Company A had total revenues of $1,000,000, of which $250,000 were paid in cash. Company A’s allowance for doubtful accounts is 3% of credit sales. The net sales on credit would be:
= $1,000,000 – $250,000, or $750,000 of credit sales
= $750,000 x 3%, or $22,500 in the allowance for doubtful accounts
= $750,000 – $22,500, or $727,500 of net credit sales