What Is Gross Sales?
Gross sales is a metric for the total sales of a company, unadjusted for the costs related to generating those sales. The gross sales formula is calculated by totaling all sale invoices or related revenue transactions. However, gross sales do not include the operating expenses, tax expenses, or other charges—all of these are deducted to calculate net sales.
The Formula for Gross Sales Is
Gross sales are calculated by adding all sales receipts before discounts, returns, and allowances together.
- Gross sales are calculated as the total sales before discounts or returns.
- They are generally only significant to companies that operate in the consumer retail industry.
- Analysts find it helpful to plot gross sales and net sales together on a graph to determine the trend. If both lines increase together, this could indicate trouble with product quality.
What Gross Sales Can Tell You?
Gross sales can be an important tool, specifically for stores that sell retail items, but it is not the final word in a company's revenue. Ultimately, it is a reflection of the total amount of revenue a business brings in during a certain period of time, but it does not account for all of the expenses accrued throughout the process of generating the products that have been sold. Gross sales are not typically listed on an income statement or often listed as total revenue. Net sales reflect a truer picture of a company's top line.
Analysts often find it helpful to plot gross sales lines and net sales lines together on a graph to determine how each value is trending over a period of time. If both lines increase together, this could indicate trouble with product quality because costs are also increasing, but it may also be an indication of a higher volume of discounts. These figures must be watched over a moderate period of time to make an accurate determination of their significance. Gross sales can be used to show consumer spending habits.
Example of How to Use Gross Sales
Most companies don’t provide gross sales in their publicly filed financial statements. Instead, it’s generally used as an internal number. For example, a company like Dollar General (NYSE: DG) or Target (NYSE: TGT) sells products to customers.
However, they offer discounts and experience product returns. These companies and many others choose not to report gross sales, instead of presenting net sales on their financial statements. Net sales already have discounts, returns and other allowances already factored in.
The Difference Between Gross Sales and Net Sales
Gross sales are the grand total of sale transactions within a certain time period for a company. Net sales are calculated by deducting sales allowances, sales discounts, and sales returns from gross sales.
Net sales reflect all reductions in the price paid by customers, discounts on goods, and any refunds paid out to customers after the time of sale. These three deductions have a natural debit balance whereas the gross sales account has a natural credit balance. Thus, the deductions are constructed to offset the sales account.
Limitations of Using Gross Sales
Gross sales are generally only significant to companies that operate in the consumer retail industry, reflecting the amount of a product that a business sells relative to its major competitors. A company may decide to present gross sales, deductions, and net sales on different lines within an income statement.
However, this is generally more confusing, so net sales are typically the only value presented. When gross sales are presented on a separate line, the figure is often misleading, because it tends to overstate the amount of sales performed and inhibits readers from determining the total of the various sales deductions.