When orders are paid for, the Accounts Receivable account is reduced for the amount of the order and cash is increased. [1] X Research source
Remember that sales tax is included in credit sales amounts. [2] X Research source
To calculate credit sales, start by finding the cash received. Lets assume that the customers on an average paid $60 in cash for those 100 laptops, so cash received would be $6000. Then, you can calculate credit sales by reducing total sales by total cash received. The credit sales would be equal to total sales minus cash received, which in this example is $10000−$6000=$4000{\displaystyle $10000-$6000=$4000}. [3] X Research source
Then, determine the cash received. This should be in the company’s records. Let the cash received for the year be $20000. Finally, calculate credit sales by finding the difference. So the credit sales can be calculated as (cash received - initial accounts receivable + ending accounts receivable). In the example above, it would be $20000 - $10000 + $5000 = $15000. So the credit sales would be $15000 for the year. [4] X Research source
For example, a company might have $200,000 in credit sales over the course of a year. Start with this value to calculate net credit sales. Total sales on credit can be found using the methods from part of this article titled “Calculating Credit Sales. "
If the company from the previous example had $15,000 in returned items over the same year, they would reduce their $200,000 in credit sales by the $15,000 to get $185,000. This information can be found in the general ledger account Sales Returns and Allowances.
For example, if the same company had $10,000 in allowances over the year, then they would further reduce their $185,000 total to $175,000. These transactions can be found in the general ledger under Sales Returns and Allowances.
For example, if the previous company determined that $5,000 worth of its returns were actually made on cash sales, it would have to increase its net credit sales value by $5,000. This would give a net credit sales value of $175,000 + $5,000, or $180,000.
For example, if a business had $200,000 in total sales over a period of time and $140,000 of those were credit sales, their percentage of credit sales would be 70 percent. This means that a large majority of their sales are made on credit and means little to a business owners on its own. However, if combined with a long or increasing collection time, this may be a cause for concern, as the business is exposed to consider liquidity risk. A manager might respond in this case by extending credit to fewer customers.
The allowance can be set by a variety of different methods, including a pure guess, since it is reconciled at the end of an accounting period.
A high value indicates that payment for credit sales is collected efficiently, whereas a low value generally means that it does not. Values are judged as relatively high or low within an industry. Overall, the goal should be to increase this ratio over time. However, a very high ratio may mean that the business is using overly-strict collection policies. [9] X Research source For example, if a business had average accounts receivable of $50,000 for the year and $600,000 in net credit sales for the same year, its receivable turnover would be 12. This result may be relatively high or low, depending on the industry the business operates in.
This ratio is simply another expression of accounts receivable turnover. Ideally, the average collection period should be reduced over time by improving collection efficiency.
