Loading the player...

What are 'Net Sales'

Net sales are the amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions. Because deductions from the gross sales are represented in the net sales figure, net sales gives a more accurate picture of the actual sales generated by the company or the money that it expects to receive.

BREAKING DOWN 'Net Sales'

Net sales measures the true top line of a business instead of the bottom line. For this reason, net sales typically do not consider the cost of goods sold, administrative and general expenses, or other costs typically factored in when determining operating income. Investors review net sales when examining a company’s income statement to determine whether to invest in the business.

If the difference between a company’s gross and net sales is greater than the industry average, the business may be giving customers a high discount or may have a substantial amount of returned merchandise. Comparing the company’s monthly income statements may help determine and solve problems before they grow.

Factors Affecting Net Sales

Gross sales are used when calculating net sales. Gross sales account for cash, debit or credit card, and trade credit sales during a preset time before subtracting discounts, merchandise returns and allowances. If using cash accounting, gross sales include those for which payment has been received. If using accrual accounting, gross sales include every cash and credit sale.

Sales returns and allowances lower net sales. Customers returning items anticipate a refund. Damaged or defective merchandise sold in its current condition may result in a price reduction or allowance. For example, a customer returns $2,500 in merchandise, and $2,500 is subtracted from gross sales. Similarly, a customer purchases $2,500 worth of defective merchandise, receives a $500 allowance, and $500 is subtracted from gross sales.

Sales discounts also lessen net sales. Discounts encourage customers to pay invoices before a preset date. As a result, the company brings in cash more quickly and reduces its accounts receivable. For example, a customer receives a $20,000 invoice with a 5% discount if paid within 20 days. The discount is $20,000 x 5% = $1,000. Therefore, the $1,000 discount reduces gross sales to $19,000.

When calculating net sales, returns, discounts and allowances are subtracted from gross sales. 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. Because $400,000 - $6,000 - $20,000 - $46,000 = $328,000, net sales are $328,000.

Example of Net Sales

In May 2016, Walgreens Boots Alliance reported a net sales increase of 2.4% for the first nine months of fiscal year 2016. Net sales increased to $29.5 billion in the fiscal third quarter, 18.4% higher than the same period the previous year.

RELATED TERMS
  1. Gross Sales

    A measure of overall sales that isn't adjusted for customer discounts ...
  2. Net Income - NI

    A company's total earnings (or profit). Net income is calculated ...
  3. Gross Rate of Return

    Gross rate of return is the total rate of return on an investment ...
  4. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  5. Volume Discount

    Volume discounts are financial incentives for individuals or ...
  6. Gross Profit

    Gross profit is the profit a company makes after deducting the ...
Related Articles
  1. Investing

    Understanding the Income Statement

    The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
  2. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  3. Financial Advisor

    A Guide on the Risk-Adjusted Discount Rate

    When a project or investment faces higher amounts of risk or uncertainty, it may be appropriate to utilize the risk-adjusted discount rate.
  4. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  5. Small Business

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  6. Small Business

    Capital Budgeting: Which is Better, IRR or NPV?

    Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense.
  7. Investing

    The Importance Of Knowing Your Net Worth

    It is vital that you track your net worth (the difference between what you own and what you owe), no matter what your age.
  8. Investing

    Analyzing Retail Stocks

    To analyze retail stocks, investors need to be aware of the most common metrics used. Find out what they are.
  9. Investing

    What Is a Cash Flow Statement?

    The Cash Flow Statement measures whether a company generates enough cash to meet its operating expenses.
RELATED FAQS
  1. What components are factored in determining net sales?

    Understand the key components that factor into determining a company's net sales. Learn about the underlying drivers of those ... Read Answer >>
  2. How do companies calculate revenue?

    Revenue is the amount of money a company receives in exchange for its goods and services. The revenue received by a company ... Read Answer >>
  3. What are the differences between gross profit and net income?

    Find out how companies determine gross profits and net income, and how these figures provide quick snapshots of their financial ... Read Answer >>
  4. Which financial accounting statement contains information on a company's net sales?

    Find out which accounting statement contains information on a company's net sales as well as other key statements analysts ... Read Answer >>
  5. What are the differences between gross profit and gross margin?

    Learn how gross profit and gross margin are calculated and how each is used in fundamental analysis. Generally, these numbers ... Read Answer >>
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center