- The Net Sales Formula
- The Three Deductions
Net sales are gross sales minus sales returns, sales allowances and sales discounts. Start from the original amount of every sale in the period, subtract the refunds for goods customers sent back, the partial refunds for goods they kept, and the early-payment discounts they took. What's left is net sales, the figure the income statement uses to work out gross margin.
Billed publishes this page. Definitions are quoted from OpenStax, Principles of Accounting, Volume 1: Financial Accounting, section 6.1, section 6.4, section 6.6 and the chapter 6 key terms, opened on October 30, 2026. For what comes after net sales, see what is gross profit.
The Net Sales Formula
Net sales = gross sales − sales returns − sales allowances − sales discounts
OpenStax's chapter 6 key terms define the two sides:
- Gross sales: "original amount of the sale without factoring in reductions for sales discounts, returns, or allowances"
- Net sales: "outcome of sales discounts, returns, and allowances deducted from gross sales"
The Three Deductions
- Sales returns. OpenStax, section 6.1: "When the customer returns merchandise and receives a full refund, it is considered a sales return."
- Sales allowances. "When the customer keeps the defective merchandise and is given a partial refund, it is considered a sales allowance."
- Sales discounts. The key terms define them as a "reduction in the selling price offered to customers who pay their account within the discount period". For how terms such as 2/10, n/30 work, see invoice payment terms explained.
In the books, none of these is subtracted from the Sales account directly. Each is recorded in its own account during the period. Section 6.1 explains that "the sales returns and allowances account is a contra revenue account with a normal debit balance that reduces the gross sales figure at the end of the period." For discounts, section 6.4 says: "Sales Discounts will reduce Sales at the end of the period to produce net sales."
Where Net Sales Appear
Net sales feed the next line of the income statement. OpenStax, section 6.6: "The multi-step statement separates cost of goods sold from operating expenses and deducts cost of goods sold from net sales to obtain a gross margin." For what goes into that cost, see what is cost of revenue.
Net sales are also the starting point for some ratios. For profit as a share of sales, see return on sales. For tracking sales over time, see sales indicators.
Worked Example: One Month's Net Sales (sample figures)
These are sample figures for a fictional home goods store, invented for this example. In March:
- Gross sales: $48,000.00, the original amount of every sale.
- Sales returns: customers sent back goods and received full refunds of $1,500.00.
- Sales allowances: a customer kept a scratched table and received a partial refund of $300.00.
- Sales discounts: customers paid $20,000.00 of invoices within a 2/10, n/30 discount period, so the discounts are 2% × $20,000.00 = $400.00.
Net sales: $48,000.00 − $1,500.00 − $300.00 − $400.00 = $45,800.00
Check: the three deductions total $1,500.00 + $300.00 + $400.00 = $2,200.00, and $48,000.00 − $2,200.00 = $45,800.00. The deductions are $2,200.00 ÷ $48,000.00 = about 4.6% of gross sales.
Where Billed Fits
Billed's invoice software page says: "Give a client a discount on an invoice, or create coupons." It also says: "Refund your customers from within Billed and keep track of refunds." A discount you put on an invoice when you bill isn't the same thing as a sales discount in the formula above, which OpenStax describes as a price reduction for customers who pay within the discount period. Keep a record of each discount and refund, and ask your accountant how they're recorded in your sales figures.
When This Guide Isn't for You
If you're not sure whether an item such as a platform fee, a shipping charge or sales tax belongs in your sales figures, ask your accountant.
Related Articles
- What Is Gross Profit?
- What Is Cost of Revenue?
- What Is Revenue Recognition?
- Return on Sales
- Sales Indicators: What Are They For?
- What Is Cost of Goods Sold (COGS) and How to Calculate It?
Frequently Asked Questions
What is the difference between gross sales and net sales?
Gross sales are the original amount of sales before any reductions. Net sales are what's left after sales returns, sales allowances and sales discounts are deducted from gross sales.
What is the difference between a sales return and a sales allowance?
With a sales return, the customer sends the goods back and receives a full refund. With a sales allowance, the customer keeps the goods and receives a partial refund.
Can net sales be higher than gross sales?
No. Net sales are gross sales minus returns, allowances and discounts, so they can't be more than gross sales.
Where do net sales appear on the income statement?
On a multi-step income statement, net sales minus cost of goods sold gives the gross margin.