How to Calculate Net Sales?

Net sales are the amount a company has earned on sales of goods after returns, allowances, and discounts have been deducted.

Net sales are calculated using the following formula:

Net sales = Total Sales โ€“ Sales Returns โ€“ Allowances โ€“ Discounts

For example:

A hotel chain has a turnover of $2,000,00 per year. However, the chain has a $50,000 newly married couple discount program for couples throughout the year. The hotel chain also refunded $20,000 to those who were displeased with the service in the same period of time. Therefore, the net revenue of a hotel chain is:

Gross Sale $2,000,00
Reduced   
Sale Discount$50,000 
Sale Returned $20,000 
Total Reduction $70,000
Net Sale 130000

Net sale = 2,000,00 – 50,000 – 20,000 = $130000

A business with high gross sales but low net sales may be too inclined to cut prices. If the low net sales result from a high amount of returns, the business may need to investigate why customers are disappointed with the services.

The net sales are part of a company’s income remaining after deducting returns, allowances for lost or damaged products, sales, and discounts.

These are the remaining sales after all returns, discounts, and concessions are removed from gross sales. Net sales do not take into account the cost of merchandise sold, general and administrative expenses, or other operating costs used to determine operating profit.

If a company’s income statement only has a line item for revenue, called “sales,” the figure is generally assumed to refer to net sales.

It is better to report gross sales in a separate item than to report only net sales. There may be substantial deductions from gross sales that, if hidden, would prevent readers of the financial statements from seeing essential information about the quality of sales transactions.

Many investors and analysts review this amount in the income statement when evaluating the health of a company. In this way, they can know whether they invest in the company.

This article also covers: 

What is the difference between gross sales and net sales?

Definition

Gross trade refers to the total amount of products sold without discounts, while net sales are total sales after deducting gross sales.

Amount

Gross sales are always higher than net sales because net income comes from gross sales.

Connection

Net income always depends on gross sales.

Calculation

To get total sales, you need to multiply the sales price per unit by the sales unit. In order to get pure sales, you will want to make total sales and get lower discounts (profits, benefits, and discounts).

Cut cost

Operating expenses are deducted from gross sales, and non-operating costs are deducted from net sales.

Importance

Net sales are more important than total sales in decision-making. Better understand the company’s current financial situation.

What can gross sales and net sales indicate?

Gross sales are not a particularly accurate measure when considering the health of a company or its sales processes. If you only consider gross sales, separated from the rest of an income statement, you may see a considerable overstatement of a company’s sales figures.

Net sales are the best and most clear reflection of the effectiveness of a company’s sales operations. Deductions are important to understand how a company sells its product or service. If you don’t consider them, you may not find the different strategies your sales team uses or how they could be more efficient.

What Does Net Sales Consist Of?

Net sales are the gross sales of a company minus three types of deductions: bonuses, discounts, and returns.

Bonuses/Allowances:  

The price reductions for defective or damaged goods. The number of bonuses or compensation will reduce gross sales.

Discounts: 

Compensate customers with a reduction in their invoice balance if payment is made by a specific date and according to the discount terms and conditions.

Returns: 

The return of products for a refund of payment. The amount of refund will reduce gross sales.

What is the Importance of Net sales?

The net sales help us know sales margins. That is, how much a sale generates after discounting the expenses of the sale itself. In this way, the exact amount of money that enters the company for sales can be established. 

This avoids the common mistake of taking sales money corresponding to sales taxes, bonds, and other elements that affect the flow of money concerning the sale.

When the net sales value is established, it is possible to generate macroeconomic data of the same company. On the other hand, profits can be established, and it is from these, a company’s income statement is defined.

What is the calculation formula for net sales revenue?

Net sales income of goods this month = sales income of goods this month-sales discounts and allowances

The formula for calculating net profit is:

Net profit = total profit – income tax expense.

Net profit is the final result of an enterprise’s operation. If there is more net profit, the enterprise’s operating efficiency is good; if there is less net profit, the enterprise’s operating efficiency is poor. It is the main indicator to measure the operating efficiency of an enterprise.

Relationship with net sales income and net income 

The relationship between net sales income and net income:

The increase in total sales does not necessarily mean that the company’s performance is growing. The growth rate of expenses may be the same as revenue growth or even exceed revenue growth. Therefore, it is important to know the relationship between net income and net sales. The relationship between them is expressed as a percentage.

The relationship between net income and net sales = net income รท net sales

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