Total revenue generated by a company, excluding any sales returns, allowances, and discounts
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What are Net Sales?
Net sales are the total revenue generated by a company, excluding any sales returns, allowances, and discounts. It is a very important figure and is used by analysts when making decisions about the business or analyzing a company’s top line growth. The formula for net sales is demonstrated in the image below:
Typically, a company’s income statement highlights the net sales figure. In some cases, companies will choose to report both gross and net sales, but they will always be displayed as separate line items. The deductions from gross sales show the quality of sales transactions. If there is a large difference between both figures, the company may be giving large discounts on its sales.
Summary
- Net sales are the total revenue generated by the company, excluding any sales returns, allowances, and discounts.
- The figure is used by analysts when making decisions about the business or analyzing a company’s top line growth.
- Net sales are derived from gross sales and are more important when analyzing the quality of a company’s sales.
Net Sales Components
The formula given above for net sales comprises several components. It is important to understand what each term in the formula indicates and its importance while deriving the net sales number:
- Gross sales: The total sales that are not adjusted for any discounts, allowances, or returns. They include all types of sales, such as cash, debit or credit card, and trade credit sales.
- Sales returns: If any goods that are purchased are eventually returned, they fall under returns. Companies typically refund the complete or partial amount of the goods, and the amount of gross sales is reduced by the amount of the refunds.
- Allowances: For any goods that are damaged, companies reduce the marked price and sell it at a lower price. The sales of such goods are recorded at a lower price; therefore, the difference between the marked price and the selling price (known as the allowance) is reduced from the gross sales number.
- Discounts: Several stores offer seasonal discounts to customers on goods purchased. Discounts can also be offered if the customer makes a bulk purchase or makes a payment before the stipulated time. Such discounts are reduced from gross sales.
Net Sales vs. Gross Sales
Gross sales and net sales are, at times, confused and assumed to be similar. Net sales are derived from gross sales and are more important when analyzing the quality of a company’s sales. Gross sales on their own are not as informative, as it overstates a company’s actual sales because it includes several other variables that cannot essentially be classified as sales.
Net sales, on the other hand, is a more accurate reflection of a company’s revenues and can be used to assess the true turnover of the company, along with deriving strategies for the sales and marketing teams to enhance future revenues.
Gross sales are calculated simply as the units sold multiplied by the sales price per unit. The gross sales amount is typically much higher, as it does not include returns, allowances, or discounts. The net sales amount, which is calculated after adjusting for the variables, is lower.
Because the non-sales revenue items are removed, net sales are a better reflection of the company’s turnover and health, and it is employed for decision-making purposes. The table below highlights the key differences between net and gross sales:
| Net Sales | Gross Sales |
|---|
| Definition | Total sales after deductions | Total sales with no deductions |
| Interdependency | Dependent on gross sales | Not dependent on net sales |
| Amount | Comparatively less | High |
| Formula | Gross Sales – Deductions | Units Sold x Sales Price |
Net Sales and the Income Statement
Net sales are depicted on a company’s income statement. Most companies directly report the net sales numbers, and the derivation is given in the notes to the financial statements. However, some companies report gross and net sales both on the income statement itself. The table below shows an excerpt from a sample income statement.
The top number is gross sales, and the different components are deducted to derive net sales. Gross profit is calculated using the net sales, and not the gross sales numbers. If the discrepancy between the gross and net sales numbers is very high, it can be a red flag that the company’s quality of revenue for the company is not good, because they are discounting products from list price to generate the revenues.
Additional Resources
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
FAQs
Net sales refer to the total revenue generated by a business after deducting the cost of goods sold, taxes, and other expenses. Gross sales revenue refers to the total revenue generated by a business before any deductions are made.
How do you calculate net sales? ›
The formula for net sales explained
- Net Sales = Gross Sales – Sales Returns – Allowances – Discounts.
- Net Sales = (Total Units Sold x Sale Per Unit Price) – Sales Returns – Allowances – Discounts.
- Net Sales = (25,000 x $20) - $40,000 - $60,000 - $20,000 = $380,000.
Very simply, gross sales are the total amount of your sales without factoring in deductions (costs incurred to close those sales). Net sales are your gross sales minus deductions such as allowances, discounts, and returns.
What is another name for net sales? ›
Net sales—also called net revenue—is the total amount of money that a company earns from the sale of its products or services minus certain deductions, including returns, discounts, and allowances.
Is net sales an income? ›
Differences: Net sales is a measure of revenue, while net income is a measure of profit. Net sales represents the total money received from sales, while net income represents the money left over after all expenses are paid.
What is meant by net sales? ›
What are Net Sales? Net sales are the total revenue generated by a company, excluding any sales returns, allowances, and discounts. It is a very important figure and is used by analysts when making decisions about the business or analyzing a company's top line growth.
How to calculate total sales? ›
The gross sales figure is calculated by adding all sales receipts before discounts, returns, and allowances together. The formula for gross sales is a simple equation that helps businesses calculate their total revenue before any deductions: Gross Sales = Sum of all sales (Total units sold x Sales price per unit).
Is net sales before or after tax? ›
Net sales are the revenues gained by your company after deducting allowances, discounts, returns, and taxes. On the other hand, profit is the net revenue you get after deducting all expenses that cost your company for production and selling.
Is net sales the same as cogs? ›
For instance, calculating your company's net sales can help you to ascertain its gross profit margin. This can be calculated by deducting your cost of goods sold (COGS) from your net sales. While COGS is not factored into net sales, you can calculate net sales by removing the value of deductions that are factored in.
Do I report gross sales or net sales? ›
Gross revenue should be reported by businesses that are the principal, have inventory at risk, establish the price for goods, and other originating company responsibilities. Net revenue is generally reported by firms that do not meet these requirements. Financial Accounting Standards Board.
Net sales is the sum of a company's gross sales minus its returns, allowances, and discounts. Net sales calculations are not always transparent externally. They can often be factored into the reporting of top line revenues reported on the income statement.
What is the legal definition of net sales? ›
Net Sales means, with respect to the Product, the gross amount invoiced by Licensee or its Affiliates or Sublicensees for sales or other disposition of the Product in the Territory, less deductions for: (i) transportation charges, including insurance actually paid; (ii) sales and excise taxes and duties paid or allowed ...
Where is net sale on a balance sheet? ›
Net sales are found in the direct cost portion of the income statement. The term Net sales refer to the revenue that a company reports after making several calculations and deductions from the gross sale. For example, such as returns, discounts, and allowances are subtracted from the gross sales.
Is net sales just revenue? ›
Your net sales is the total sum of your sales after deducting all costs of products sold and operational expenditures. In other words, this is the amount of revenue you're generating from the sales of goods and services alone, after the expenses of refunds, discounts, and deductions.
What category is 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.
Does net sales include salaries? ›
Net profit is your gross profit minus the indirect costs of operating your business that don't fall into COGS. This would include transactions affecting net sales like taxes, salaries, depreciation, administration, and other operating expenses.
What is the calculation to figure what your net sales are? ›
Understanding Net Sales
Companies may not provide a lot of external transparency in the area of net sales. Net sales may also not apply to every company and industry because of the distinct components of its calculation. Net sales is the result of gross revenue minus applicable sales returns, allowances, and discounts.
What is the formula for net income on sales? ›
The formula to determine net income is sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. Net income appears on a company's income statement and is an indicator of a company's profitability.
What is the formula for net revenue? ›
Net revenue = gross revenue - discounts - returns - commissionsThe net revenue formula is an important tool that business accountants can use to quickly calculate a company's total earnings after subtracting specific sales-related data.
What is the formula for percentage of net sales? ›
Sales Percentage = (Item Sales / Total) × 100
Let's break it down step by step: Item Sales: This is the amount of money you've made from an individual item. For example, the total number of lemonades sold. Total: This is the grand sum of everything you're working with.
