How To Calculate Credit Sales

By Indeed Editorial Team

Updated August 2, 2022 | Published April 26, 2021

Updated August 2, 2022

Published April 26, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

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When you own a business, it's important to have the most accurate picture of your company's financial performance. Not only do you need to know your company's cash sales, but you also need to know the amount of credit sales it's had during a given time period. Performing this calculation helps you analyze your company's selling practices.

In this article, we define credit sales and net credit sales, plus the accounts receivable turnover ratio, explain where to find a business’s credit sales on a balance sheet and list the steps for calculating credit sales.

What are credit sales on a balance sheet?

Credit sales refer to a sales transaction wherein a payment gets made at a later date. This means that while a customer purchased a product or service without sufficient cash at the time of the transaction, they won't pay for the sale until several days or weeks after the fact.

Therefore, credit sales differ from cash sales where customers need to make a full payment on the date of the sale. Keep in mind that credit sales don't represent sales made on credit cards. To record a credit sale, you debit the customer receivables account and credit the sales revenue account.

Related: How To Create a Balance Sheet (With Examples and Tips)

What are net credit sales?

Net credit sales refer to the worth of credit sales after deducting the company's sales returns and sales allowances. Sales returns refers to merchandise returned to the company by customers. If a customer returned a product they purchased on credit, for example, you need to deduct the worth of the product when calculating net credit sales.

Sales allowance is the reduction of an item's original price because of an issue with the transaction. For example, a customer may receive an allowance if they purchased a product at a higher price point because of a pricing error made during the sales transaction.

Here is the net credit sales formula:

Net credit sales = sales on credit - sales returns - sales allowances

Related: Net Sales: Definition and How To Calculate Them

Where can you find credit sales on a balance sheet?

You can find a company's credit sales on the "short-term assets" section of a balance sheet. Because companies don't receive payments from credit sales for many weeks or even months, credit sales appear as accounts receivables, a component of short-term assets on the balance sheet.

As previously stated, you need to debit the company's receivables account and credit the sales revenue account in order to record the credit sale. The accounts receivable asset account also records other amounts of money owed to the company by its customers.

Apart from the balance sheet, you can also find credit sales in the "total sales revenue" section on a profit and loss statement. In addition, credit sales also affect cash flow statements and equity reports.

What is the accounts receivable turnover ratio?

The accounts receivable turnover ratio is an accounting formula used to determine a company's ability to collect the money it's owed by its customers or clients. It essentially lets you know how well a company manages the credit it extends to these individuals. In order to determine the accounts receivable turnover, you need to know the net credit sales. Here's the accounts receivable turnover ratio:

Accounts receivable turnover = net credit sales / average accounts receivable

Related: Q&A: What Is Accounts Receivable and How Does It Work?

How to calculate credit sales

You can use a variety of methods to calculate your company's credit sales. Here are the three methods and steps for calculating credit sales:

1. Take the sum of individual credit sales

Find the total amount of credit sales by keeping your accounts receivable account current. This means updating it for every sale made on credit. Doing this provides you with greater accuracy since it accounts for changing product prices in addition to all cash sales.

If you want a credit sales total for a specific time period, record a credit sales amount at the start of that period. Keep in mind that credit sales amounts include sales tax.

Related: A Guide To Comparing Balance Sheets

2. Calculate credit sales from total sales

You can also calculate credit sales from total sales. To calculate total sales, you need to multiply the number of goods sold by the selling price for these items. To start calculating credit sales, determine the cash received. Once you have these figures, determine credit sales by reducing total sales by the amount of total cash received.

For example, let's say you plan to sell 100 TVs at $200 each. This leaves you sales of $20,000. Now, let's assume customers paid an average of $50 in cash for the 100 TVs, leaving you with cash received of $5,000. To calculate credit sales, reduce the total sales by total cash received as follows:

$20,000 - $5,000 = $15,000

The credit sales equals total sales minus cash received.

Related: 13 Basics of Small Business Finance To Know

3. Calculate credit sales from accounts receivables

You can also calculate credit sales using accounts receivables. For example, determine the initial value at the start of a year listed on the company's balance sheet. Let's say you have an initial value of $20,000.

Next, find the ending accounts receivable. This refers to the value at the end of the year which you can also locate on the balance sheet. Let's say it's $10,000. Now, determine the cash received by looking at the company's records. Let's say this amount is $40,000. Once you have these figures, take the difference in order to calculate credit sales. You can calculate credit sales as follows:

Credit sales = Cash received - Initial accounts receivable + Ending accounts receivable

Using the example, you'd calculate credit sales as follows:

$40,000 - $20,000 + $10,000 = $30,000

In this case, you have a credit sales of $30,000 for the year.

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