What is Net Sales
Net sales are the sum of a company's gross sales minus its returns, allowances, and discounts. Revenues reported on the income statement often represent net sales.
BREAKING DOWN Net Sales
Net sales typically do not account for the cost of goods sold, administrative and general expenses, or other operating costs used to determine operating income. Many investors and analysts review this amount on the income statement when assessing the health of a company and whether to invest.
Factors Affecting Net Sales
Gross sales are the total unadjusted sales (pre-discounts, allowances, and returns) of a company. Gross sales include cash, credit card, debit card, and trade credit sales. The two common methods for recording sales are cash accounting and accrual accounting. Cash accounting is an accounting method in which receipts are recorded for the period received. Accrual accounting is an accounting method in which revenues/sales are accounted for when earned rather than when payment is received.
Sales returns and allowances reduce gross sales. The return of goods for a refund is called a return. For example, Susan G. purchased a $500 area rug and returned it 5 days later for a full refund. This return reduces gross sales by the amount refunded. Allowances are price reductions for defective or damaged goods. For example, Susan B. selects a $2,500 defective lamp to purchase. Prior to purchase, the retailer reduces the price by $500 to compensate for the defect. As a result, gross sales are reduced by the amount of the allowance.
Sales discounts also reduce gross sales. Discounts reward customers with a reduction in their invoice balance if payment is made by a specific date and according to the discount stipulations. For example, a customer with an invoice balance of $20,000 will receive a 5% discount if it is paid within 20 days of the notice. If the customer remits payment on day 10, the invoice is reduced by $1,000 ($20,000 x 5%). As a result, gross sales are also reduced by $1,000.
If the difference between a company’s gross and net sales is greater than the industry average, the company may be offering higher discounts or realizing an excessive amount of returns compared to industry players. Comparing monthly income statements may help identify potential problems and enable the creation of viable solutions. For example, Store A has gross sales of $400,000, discounts of $6,000, returns of $20,000 and allowances of $46,000 at month end; net sales total $328,000, a difference of $72,000 (18%) from gross sales. If comparable to the economic players in the industry, there may be no need to adjust operations and/or policies. However, if the industry's difference averages approximately 8%, the firm may need to reexamine its policies regarding discounts, returns, and allowances.