How to Calculate Net Sales?
Net sales is what remains after all returns, allowances and sales discounts have been subtracted from gross sales.
For example, if a company has gross sales of $100,000, sales returns of $5,000, sales allowances of $3,000 and discounts of $2,000, the net sales are calculated like this:
$100,000 Gross Sales – $5,000 Sales Returns – 3,000 Sales Allowances – $2,000 Discounts = $90,000 Net Sales
Net sales is usually the total amount of revenue reported by a company on its income statement, which means that all forms of sales and related deductions are combined into one line item. Gross sales should be shown in a separate line item than net sales as there can be substantial deductions from gross sales. If this deduction is hidden on a financial statement, the statement will be missing key information about the quality of sales transactions.
It is best to report gross sales, followed by all the discounts that were given on sales and then listing the net sales number. Showing your sales this way clearly show when there is a change in sales deductions, overly large marketing discounts and other changes to the quality of sales. Financial statement notes should clarify as to any reasoning behind large discounts from sales.
If a business only has a single line item that is labeled “ sales”, it is assumed that figure refers to net sales.
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What Is the Formula for Net Sales?
Net sales are the sum of a company’s gross sales minus its returns, allowances and discount.
So, the formula for net sales is:
Net Sales = Gross Sales – Returns – Allowances – Discounts
When the difference between a business’s gross and net sales is greater than the industry average, the company may be offering higher discounts or experiencing an excessive amount of returns compared to their industry counterparts.
What Does Net Sales Consist Of?
Net sales is equal to gross sales minus sales returns, allowances and discounts.
Gross sales: the total unadjusted sales of a business before discounts, allowance and returns. Including cash, credit card, debit card and trade credit sales.
Returns: the return of goods for a refund of payment. Gross sales are reduced by the amount refunded.
Allowances: price reductions for defective or damaged goods. Gross sales are reduced by the amount of the allowance.
Discounts: rewards customers with a reduction in their invoice balance if payment is made by a specific date and according to the discount stipulations.
How Do You Calculate Net Sales Revenue?
An income statement is a financial statement that reveals how much income your business is making and where it is going. The net sales figure on an income statement shows how much revenue remains from gross sales when sales discounts, returns and allowances are subtracted.
Gross sales is the total unadjusted income your business earned during a set time period. This figure includes all cash, credit card, debit card and trade credit sales before deducting sales discounts and the amounts for merchandise discounts and allowances. With the cash accounting method, gross sales are only the sales which you have received payment. If you your company uses the accrual accounting method, gross sales include all your cash and credit sales.