The amount a company makes from its sales is not based just on the amount of revenue its products bring in. Other factors must be considered, including the money paid out for returns and any discounts offered because of customer complaints. When these amounts are deducted from a company's sales, it is referred to as the net credit sales total.
Determine the amount of gross sales your business made during the time period for which you wish to calculate the net credit sales. Typical time periods are one month, one quarter and one year. Assume the gross sales were $75,000 for the year.
Determine your sales-return number for the same time period as your gross sales. The sales-return number is the amount of money a company paid back to customers in exchange for products the customers returned for a refund. Assume a sales-return total of $5,000 for the year.
Compute the sales allowance for the time period. This is the amount of the discount you provided to customers off future purchases in exchange for keeping products they would have returned otherwise. An example of this is if someone found a small tear on the seam of a pair of jeans but repaired it instead of returning it, and you gave him 10 percent off his next purchase. Assume a sales allowance of $2,000 for the year.
Combine the totals in Steps 2 and 3. This total is commonly referred to as the sales return and allowances total. In this example, that total is $7,000.
Subtract the sales and allowances total from the gross sales total for the time period. In this example, $7,000 is subtracted from $75,000 for a result of $68,000. $68,000 is your net credit sales, which is your gross sales minus your sales and allowances.
Even if you sell an item that is returned, it is important to count the return in the sales-return calculation to offset the income for the first sale so you do not record the income received twice for the same product.
Only record an amount as a sales allowance when the customer uses the discount she was offered. If a customer does not use the discount, the sales allowance is not recorded. This makes accurate tracking of discount offers crucial to the accounting for your business.