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.
Components of the Net Sales
Generally using the below mentioned four components are used for the calculation of the net sales:
- Gross Sales – The total unadjusted sales which the company makes during the period under consideration are known as the gross sales of the company.
- Sales Returns – Many companies allow its buyers to return the sold item within a period of time against full refund and when those sold items are actually returned then they will be counted 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 any complaint from the side of the buyer regarding the damage of the goods during transportation or the wrong delivery of the 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.
Net Sales Formula
The formula for calculating the net sales is as below:
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 company 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.
Thus the net sale of the company for the month of July-2019 is $ 85,000.
Advantages of the Net Sales
- Changes in the value of the net sales have an effect on the gross profit and the gross profit margin of the company, so it should be shown by the company in its statement of income.
- While deriving at the net sales of the company, different components are also generally presented by companies like Sales returns, allowances, and the discount.
- Using this presentation, it makes it easier for the different user 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 financial statement or not etc.
Limitations
- It is not necessary that net sales apply to each and every company in existence because of various distinct components for its calculation.
- 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 sold, marketing expenses, general expenses, and the administrative expenses.
Important Points
- 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. Using this presentation format, it makes it easier for the different user 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 financial statement or not etc.
- 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 costs portion or on the other hand they may report only the net sales on the top line of the income statement.
- Changes in the value of the sales have an effect on 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 period 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. It is not necessary that net sales apply to each and every company in existence because of various distinct components for its calculation.
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