Net Sales Formula

Net Sales Formula in Accounting

Net sales formula in accounting is used to calculate the sales of the company net of its return, discounts and other allowances where the formula of net sales is gross sales revenue generated minus sales returns, discounts allowed to the customers and allowances.

Net Sales = Gross Sales – Sales Return – Allowances – Discounts
Net-Sales-Formula

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Source: Net Sales Formula (wallstreetmojo.com)

 

Explanation

The formula of net sales in accounting calculates the Net RevenueNet RevenueNet revenue refers to a company's sales realization acquired after deducting all the directly related selling expenses such as discount, return and other such costs from the gross sales revenue it generated.read more of the firm after accounting for any sales return, discounts, allowances. The return would also include any damaged product or missing products.

The gross sales or gross revenue depicts the total income a company or a firm who shall earn during a specified time, which could be a year or a quarter, and that shall include all the credit card, cash, trade creditTrade CreditThe term "trade credit" refers to credit provided by a supplier to a buyer of goods or services. This makes it is possible to buy goods or services from a supplier on credit rather than paying cash up front.read more sales, and debit card sales performed during that time, including the discounts and allowances for sales.

At the end of the accounting periodThe End Of The Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more, the company shall calculate the total sales discount and total sales allowances, and this figure will be subtracted from the gross sales to arrive at the net sales. The amount that is received from the customer or says the amount that is realized from them is the net sales figure, and the same gets reported on the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more.

Examples

You can download this Net Sales Formula Excel Template here – Net Sales Formula Excel Template

Example #1

ABC limited wants to record the revenue figure in the income statement for the year ended 20XX.

  • Gross Revenue: 5000000.00
  • Allowances: 100000.00
  • Sales Return: 150000.00
  • Discounts: 250000.00

You are required to compute the net revenue figure based on the above information provided.

Solution

Net Sales can be calculated using the above formula as,

Net Sales Formula Example 1.1png
  • 50,00,000 – 150,000 – 100,000 – 250,000
Net Sales Formula Example 1.2png
  • Net Sales = 45,00,000.00

Therefore, the firm needs to record 45,00,000 as Net Revenue in its income statement.

Example #2

Vijay started a new business around a year ago. He entered the business of bike sales. Last year the firm sold 50,000 units of S model bike, 10,000 units of S+ model bike, and 2,500 units of Super S+ model bike. However, there we some sort of complain related to the performance of the bike, and as a percentage, some of the bikes came back were: 10% of S model bike, 5% of S+ bikes, and 1% of the Super S+ bikes.

The price range was 50,000, 70,000, and 100,000 for the S model, S+ model, and Super S+ model, respectively. It’s the policy of the company to provide a flat 2% discount on the gross amount of bike as a completion of one year of the firm. These bikes are subject to service semi-annually, and hence those are treated as a firm’s expenditure: 1% of the gross amount for the S+ model and Super S+ model only.

 Considering all of the above facts, you are required to calculate the net revenue that Vijay’s firm should record in its books of account.

Solution

Here, we are not given any of the figures directly, and hence we will first calculate all of those individually.

Example 3.3png

= 3,45,00,00,000.00  – 28,75,00,000.00  – 95,00,000.00  –   6,90,00,000.00

  • Net Sales =  3,08,40,00,000.00

 Therefore, the firm needs to record 3,08,40,00,000.00  as Net Revenue in its income statement.

Example #3

BBZ is in the sales of software in the Kurla market. Below are the common size statementsCommon Size StatementsIn a common size financial statement, each element of financial statements are shown as a percentage of another item. For instance, in case of the Balance Sheet assets, liabilities, and share capital are represented as a percentage of total assets. In the case of Income Statement, each element of income and expenditure is defined as a percentage of the total sales.read more for the income statement, which was reported to the bank for loan approval.

As an accountant to the firm, he was asked to help the bank in providing the numbers. The bank has requested him to provide the net revenue figure.

 He noted that 3,700 units of software were sold at the rate of 2,000 per piece. You are required to calculate the net revenue figure.

  • Gross Revenue: 100.00%
  • Cost of Goods Sold: 66.84%
  • Allowance: 2.96%
  • Sales Return: 4.44%
  • Discounts: 7.40%

Solution

 We shall first calculate gross revenue and arrived at the net revenue after taking into account all of the sales returns, allowances, and discounts.

 Gross sales will be no of units * selling price per unit which is 3,700 units * 2,000 which equals to 74,00,000

We can now calculate other figures per percentage of revenue as given in the question.

Example 3.1png
  •  74,00,000.00   – 3,28,560.00   – 2,19,040.00   – 5,47,600.00

Net Sales will be – 

Example 3.2png
  • Net Sales = 63,04,800.00

Therefore, the firm needs to record 63,04,800.00 as Net Revenue in its income statement and report the same to the bank.

Relevance and Uses

Net Sales can be used for many purposes like if there is the difference between a company’s net and gross sales is more than the figure of the industry average, the firm may be offering lucrative discounts or they may be realizing a greater amount of sales returns when compared with their peers. While comparing income statements say monthly, that could help them identify any potential problems and look for viable solutions.

Recommended Articles

This has been a Guide to Net Sales Formula. Here we discuss how to calculate net sales along with practical examples and template. You can learn more about financial analysis from the following articles –