Net Sales

What are Net Sales?

Net sales are the revenue earned by the company by the way of selling its goods or services and it is calculated by deducting the returns, allowances and the other discounts from the gross sales of the company. These are presented in the statement of income of the company and the best way to report the statement of income financial statement is to report the total gross sales of the company followed by the returns, different discounts and the allowances to derive at the net sales figure.

Net Sales = Gross Sales (Total Revenue) – Sales Returns – Allowances – Discounts
Net-Sales

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Components

Components of Net Sales

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  • Gross Sales – The total unadjusted sales which the company makes during the period under consideration is known as the gross sales of the company.
  • Sales Returns – Many companies allow their buyers to return the sold item within a period against the full refund. When these sold items are returned, they count as the sales return of the company.
  • Allowances – The allowances are given to the customer if the company agrees to lower down its already book revenue. This type of situation generally arrives when there is a complaint from the buyer’s side regarding the damage of goods during transportation or the wrong delivery of goods. So in these cases, a partial refund is given to the customer in the form of the allowances.
  • Discounts – Sometimes, different discounts are offered by the seller on their products to the customer on meeting certain terms like on paying the bills earlier than the due date. In such circumstances, the buyer has to pay an amount lower than the billed amount.

Example of Net Sales

For example, there is a Company XYZ ltd manufacturing and selling different textile items in the market. The total gross sales of the companyGross Sales Of The CompanyGross Sales, also called Top-Line Sales of a Company, refers to the total sales amount earned over a given period, excluding returns, allowances, rebates, & any other discount. read more for the month of July-2019 were $ 100,000. Out of the total sales, during the same period sales, returns were $ 2,000, sales allowances were $ 3,000, and the discounts given were $ 10,000. Using the given figures, calculate the net sales of the company for the month of July-2019.

Solution:

Calculation of the net sales of the company for the month of July-2019 is as follows:

These are calculated by deducting the returns, allowances, and the other discounts from the gross sales of the company.

Net Sales Example

Advantages

  1. Changes in the value of the net sales affect the gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more and the gross profit margin of the companyGross Profit Margin Of The CompanyGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold.read more, so the company should show it in its statement of income.
  2. While deriving at the net sales of the company, different components are also generally presented by companies like Sales returns, allowances, and the discount.
  3. Using this presentation, it makes it easier for the different uses of the financial statement to check if any recent changes that took place with respect to the sales deductions, if any discount of huge amount is given during the period and whether the reason of the same are disclosed in the notes to the financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more or not, etc.

Limitations

  1. It doesn’t need to apply to every company in existence because of various distinct components for its calculation.
  2. Different components used for the better analysis of the company working by the different users of the financial statements are not accounted for in the Net sales, such as the cost of the goods soldCost Of The Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more, marketing expenses, general expenses, and the administrative expensesAdministrative ExpensesAdministrative expenses are indirect costs incurred by a business that are not directly related to the manufacturing, production, or sale of goods or services provided, but are necessary for the smooth functioning of business operations, such as information technology, finance & accounts.read more.

Important Points

  1. The best way to report the statement of income financial statements is to report the total gross sales of the company, followed by the returns, different discounts, and the allowances to derive at the net sales figure. Using this presentation format, it makes it easier for the different uses of the financial statement to check if any recent changes that took place with respect to the sales deductions, if any discount of the huge amount is given during the period and whether the reason of the same are disclosed in the notes to the financial statement or not, etc.
  2. It varies from company to company to adopt the way of presenting its sales. Many of the companies report the gross sales and then the net sales in income statement’s direct costsDirect CostsDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more portion, or on the other hand, they may report only the net sales on the top lineTop LineThe top line is the revenue earned by the business by selling goods or services, reported in the income statement for a defined period. read more of the income statement.
  3. Changes in the value of the sales affect the gross profit and the gross profit margin of the company, but it does not include the costs of the goods sold.

Conclusion

Thus it can be concluded that at the accounting periodAccounting 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 end, firms should calculate the total value of the sales allowances and total sales discounts during the period and subtract the same from the total value of gross sales in order to arrive at the net sales figures. The figure derived shows the actual amount of receipt from the customers is reported on the statement of income of the company. Net sales don’t need to apply to every company in existence because of various distinct components for its calculation.

This article has been a guide to What are Net Sales and its Definition. Here we discuss the formula for calculating the net sales along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

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