What Is Net Sales?

A company's net sales is its 澳洲幸运5开奖号码历史查询: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 the incom💖e statement is where net sa🅺les can be found.

However, some companies do not provide a lot of transparency in the area of net sales. Net sales may also not apply to every company and industry because of the distinct components of th🦹eir calculation.

Calculating Net Sales

Net sales is 𒀰calculated as gross revenue minus applicable sales returns, allowances, and🐽 discounts.

The costs associated with net sales affect a company’s 澳洲幸运5开奖号码历史查询:gross profit and gross profit margin, but the net sales number does not include the cost of goods sold, w𝔉hic𓂃h 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 they may just report net sales on the top line ꦑand then move on to costs of goods sold.

Companies that sell goods and services on credit might also include 澳洲幸运5开奖号码历史查询:net credit purchases—sometimes called total net payables—in this section o🐬f the financial statement.

Net sales do not account for cost of good♕s 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 o🔜f🥃 a company.

If the compaඣny uses accrual accounting, gross sales are booked when a transaction takes place. If ♏it uses cash accounting, they are booked when cash is received.

Some co💞mpanies may not have any costs that will require a net sales calculation. Sales returns, allowances, and discounts are the three main costs that can affect net sales. All t𝕴hree costs generally must be expensed after a company books revenue.

As such, each of these types of costs will need to be accounted for across a company’s financial reporting to ensure proper performance ana꧙lysis.

Sales Returns

Sales returns are common in the retail business. These companies allow a buyer to return an item within a certain number o𓂃f days for a full refund. This can create some complexi🌜ty in financial statement reporting.

Compa💛nies that allow sales returns must provide a refund to the customer. A sales return is usually accounted 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 carries over to the income statement as a re🔯duction in revenue.

In many cases, the sales return can be resold. This requires a company to make additional notations to accou♛nt for the item as inventory.

Allowances

Allow🍎ances 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 selle๊r may provide the buyer with a partiꦉal 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 refꦛerred to as allowances. A write-off is an expense debit that correspon🏅dingly lowers an asset inventory value.

Companies adjust for write-offs or write-downs on inventory due to losses or damages. These write-offsꦏ 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开奖号码历史查询:1/10 net 30. That is, customers get a 1% discount if they pay within 10 days of a 30🌟-day invoice.

Sellers don’t account for a discount unless a customer pays early, so n🥀ot♈ations 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 rev🦋enue on the income statement by the amount of the discount.

Net Sales Considerations

If a company provides full disclosure o𝕴f 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 realizing an excessi💮ve amount of returns compared to industry competitors.

Companies generally strive to meet or beat industry averages. Often, returns can be qu𝐆ickly resold without creating issues.

Allowances are typically🎉 the result of transporting problems which may prompt a company to review its shipping tactics or storage meth♍ods.

Companies offering discounts may choose to lower or increase their discount terms to become more competitive wi🃏thin 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.