How to Calculate Net Sales?

This may raise potential concerns about your short-term profitability. Net Sales refers to your company’s total sales during an accounting period less any allowances, sales returns, and trade discounts. Furthermore, Net Sales are primarily indicated in the income statement of your business.

In the net sales calculation, the discount figure will refer to the total amount of money knocked off your sales within a specific period of time. It’s also a key metric you need when calculating how profitable you are. If you use gross sales instead in a profit calculation, you’re likely to overestimate your company’s profitability. When managers review sales activities and determine how successful the company is, it is important that they have the net sales amount to evaluate.

Gross vs. Net Revenue: What is the Difference?

These combine to make a fairly typical $400 (8% of sales) in returns. Companies that allow sales returns must provide a refund to their customer. A sales return is usually accounted for either as an increase to a sales returns and allowances contra-account to sales revenue or as a direct decrease in sales revenue. As such, it debits a sales returns and allowances account (or the sales revenue account directly) and credits an asset account, typically cash or accounts receivable.

Finally, discounts offered to customers are also deducted from the net sales. The gross sales figure is the total income your business earned during a set time period. It includes all your cash, credit card, debit card and trade Learn About Real Estate Bookkeeping Best Practice credit sales before you deduct the sales discounts and the amounts for merchandise returns and allowances. If you use the cash accounting method, your gross sales only include the sales for which you have received payment.

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For companies using cash accounting they are booked when cash is received. Some companies may not have any costs that will require a net sales calculation but many companies do. Sales returns, allowances, and discounts are the three main costs that can affect net sales.

You must note that sales allowance is created once you bill your consumers. The amount allowed for trade discounts indicates the disparity between the standard price and the actual price that consumers pay you. Remember, the trade discount allowance reduces your total sales to represent the actual price that your consumers pay. https://adprun.net/bookkeeping-for-independent-contractors-a-guide/ The profit and loss statement of your business measures Net Sales and expenses during a specific accounting period. The Net Profit is the difference between your sources of revenue and expenses related to such revenue. With all of these values to track, it can be challenging to keep careful records of sales and deductions.

Net Sales: Definition

Tracking net sales also addresses the underlying reason for the sales adjustments. For instance, if your sales allowances are high, you might need to address product defects and perhaps look for a new supplier. If your product returns are high, investigate why so many customers are returning your product. By recording the adjustments this way, gross sales will be reduced from the original $62,000 by the debit amounts in the contra accounts, with net sales revenue totalling $55,650.

Based on your gross and net sales, you can see where to allocate spending, how much to allocate and where spending might not be necessary. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Net sales is a high-level metric that doesn’t always tell the whole story.

Is net sales the same as profit?

Therefore, you need to adjust such items to compute net sales for your business. If your gross sales are high but net sales indicate that one of your products is being returned more than usual, you can use this information to identify what’s wrong. Then, you can make changes to provide a better product or service to your customers. When the order has been returned, the refund is credited to the customer’s account.