The process involves determining the total revenue generated from sales where customers are allowed to pay at a later date, then subtracting any deductions, such as sales returns, allowances, and discounts. For instance, if a company has \$500,000 in gross credit sales, \$20,000 in sales returns, \$5,000 in allowances, and \$3,000 in discounts, the result would be \$472,000.
This calculation is critical for understanding the true financial health of a business. It provides a more accurate picture of actual revenue earned from deferred-payment transactions, allowing for better assessment of profitability, cash flow, and accounts receivable management. Historically, tracking these figures provided insight into payment behavior and the effectiveness of credit policies.