Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding. Net Credit Sales Credit sales refer to the total value of salesRead more
Sure, John, firstly I would like to explain the meaning of net credit sales before moving onto the formula of net credit sales. To make the concept easy and transparent, I would like to add a practical example for better understanding.
Net Credit Sales
Credit sales refer to the total value of sales which an organization (or) company makes on credit. If the company offers any discount to its customers on the credit sale of goods (or) if sales returns occur, then such amounts must be deducted from the total value of credit sales to arrive at Net credit sales figure.
In simple terms, net credit sales refer to the total revenue generated by the company when it sells goods and services to its customers on credit, reducing the amount of sales allowance and sales return from the total credit sales.
Net Credit Sales Formula
Net Credit Sales = Total Credit Sales – Sales Returns – Discount on Sales |
Example-
Apple Inc furnishes you the following sales information. Calculate the value of Net credit sales.
Particulars | Amount |
Total Sales | 4,50,000 |
Cash Sales | 1,50,000 |
Credit Sales | 3,00,000 |
Goods Returned by Customers | 1,00,000 |
Sales Allowance/Discount | 60,000 |
Net Credit Sales = Credit Sales – Sales Returns – Discount allowed on Sales
= 3,00,000 – 1,00,000 – 60,000
= 1,40,000
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Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more
Meaning of Days Payable Outstanding
Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.
If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.
Formula
The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.
Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.
Example
ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.
Calculation Part-
Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold
= 45,000 * 30/2,25,000
= 6 Days
In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.
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