What Is Net Sales?

A company's net sales is its 澳洲幸运5官方开奖结果体彩网:gross sales minus its returns, allowances, and discounts.

The company's net sales number is not the same as its profits. The net sales number does not factor in the cost of the goods sold, general expenses, or administrative expenses.

The net sales number is not always reported separately on a company's income statement. It is often factored into the top line revenues reported on the income statement. 

Understanding Net Sales

Investors who are considering buying stock in a company look closely at the company's latest income statement when analyzing a company’s revenues, revenue growth, and operational expenses. The income statement is broken out into three parts: direct costs, indirect costs, and capital costs.

The direct costs portion of thꩲe income statement is where net sales can be found.

H♔owever, some companies do not provide a lot of transparency in the area of net꧙ sales. Net sales may also not apply to every company and industry because of the distinct components of their calculation.

Calculating Net Sales

Net sales is calculated as gross revenue minus applicable sa♈les returns, allowances, and discounts.

The costs associated with net sales affect a company’s 澳洲幸运5官方开奖结果体彩网:gross profit and gross profit margin, but the net sales numbe♉r does not include the cost of goods sold, which is a primary driver of gross profit margins.

If a business has any returns, allowances, or discounts, then adjustments are made to identify and report net sales. Companies may report gross sales, then net sales, and cost of sales in the direct costs portion of the income statement, or ಞthey may just report net sales on the top line and then move on to costs of goods sold.

Companies that sell goods and services on credit might also include 澳洲幸运5官方开奖结果体彩网:net credit purchases—sometimes called t🐓otal net payables—in this section of the financial statement.

Net salꦚes do not account for cost of goods sold, general expenses, and administrative expenses, which are analyzed with different effects on income statement margins.

Costs Affecting Net Sales

Gross﷽ sales are the total unadjusted sales of a company.

If the company uses accrual accounti♋ng, gross sales are booked when a transaction takes place. If it uses cash accounting, they are booked when cash is received.

Some companies maꦫy not have any costs that will require a net sales cal𒐪culation. Sales returns, allowances, and discounts are the three main costs that can affect net sales. All three costs generally must be expensed after a company books revenue.

As such, eac🧔h of these types of costs will need to be accounted for across a company’s financial reporting to ensure proper performance analysis.

Sales Returns

Sales returns are common in the retail business. These compan💎ies allow a buyer to return an item ﷽within a certain number of days for a full refund. This can create some complexity in financial statement reporting.

Companies that allow ꦺsales returns must provide a refund to the customer. A sales return is usually ꦰaccounted for either as an increase to a sales return 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. This transaction carrie༒s over t🐷o the income statement as a reduction in revenue.

In many cases, the sales return can be resold. This requires a company to make𒐪 additional notations to 🌟account for the item as inventory.

Allowances

A🌜llowances are less common than returns but may arise if a company negotiates to lower an already booked revenue.

If a buyer complains that goods were damaged in transportation or the wrong goods were sent in an order, a seller mꦫay provide the buyer with a partial refund. In this case, the same types of notations would be required.

A seller would need to debit a sales returns and allowances account and credit an asset account. This journal entry carries over to the income statement as a reduction in revenue.

Net sales allowances are usually different than write-offs which may also be referred to as allow🐷ances. A write-off is an expense debit that correspondingly lowers an asset inventory value.

Companies adjust꧋ for write-offs or write-downs on inventory due to losses or damages. These write-offs occur before a sale is made rather than after.

Discounts

Many companies working on an invoicing basis will offer their buyers discounts if they pay their bills early. One example of discount terms would be 澳洲幸运5官方开奖结果体彩网:1/10 net 30. That is, cus🌃tomers get a 1% discount if they pay within 10 days 𓂃of a 30-day invoice.

Sellers don’t acc﷽ount for a discount unless a customer pays early, so notations෴ are retroactive.

Discounts are notated similarly to returns and allowances. A seller will debit a sales discounts contra-account to revenue and credit assets. The journal entry then lowers the gross revenue on the income statement 🎐b꧑y the amount of the discount.

Net Sales Considerations

If a company provides full disclosure of its gross sales vs. its net sales it can be a point of interest for external analysis. If the difference between a company’s gross and net sales is higher than an industry average, the company may be offering higher discounts or realiz🌸ing an excessive amount of returns compared to ind🌳ustry competitors.

Companies generally strive to meet or beat industry averages. Often, returns can be quickly resold without crea🌜ting issues.

Allowances ar💟e typically the result of transporting problems which may prompt a company to review its shipping tactics or storage methods.

Companies offering discounts may choose to lower or increase their discount terms to become more 🐬competitive within their industry.

The Bottom Line

The net sales number is a company's gross revenue minus several directly related factors that affect sales. It doesn't reflect the costs related to producing the products that are sold. Therefore, it is most usefully considered in comparison with the company's costs of doing business. The comparison can reveal how efficiently the business is being run.