Calculating Net Sales

Once you’ve accounted for all returns, sales discounts and allowances, what remains of your gross sales figure is your net sales.

A business with gross sales of $50,000, discounts of $3,000, sales allowances of $4,000 and sales returns of $2,000, for example, would have net sales of $41,000.

Net sales is the amount of revenue a business will usually report on its income statement, combining the various categories of sales and associated deductions into a single line item. Because these deductions can be considerable, gross sales should also be listed as a separate item on the income statement. Without gross sales, the income statement is missing vital information about the quality of sales transactions.

Best accounting practice is to begin with your gross sales figure, itemise all discounts and deductions, and then show the resulting net sales figure. Detailing each item transparently allows you to identify excessive discounts, changes in sales deductions, and other factors important to your business.

The formula for calculating net sales – gross sales less discounts, allowances and returns – is as follows:

If a business identifies that the difference between gross and net sales is higher than the average across the industry, it may indicate that there are unusually high returns, or that they are offering higher than typical discounts in comparison with other businesses in the same industry.

Net sales is the result of subtracting all relevant deductions from the gross sales figure. These deductions include:

• Discounts.  Any price reduction offered to a customer, either as an incentive to purchase or as a reward for loyalty, for example.
• Allowances. If a product falls short in some way but does not merit a return, a partial refund may be offered.
• Returns. This includes both the physical return of a product for any reason, and the refund of the price paid for a product.

Net sales are what remains after discounts, allowances and returns have been deducted from gross sales.

However, not every business reports gross sales the same way.

Gross sales is the total income generated by a business over a given reporting period. If a business uses the accrual accounting method, this will include the total of all sales, including cash, credit and debit card, and trade credit purchases – all payments whether they have been received or are owed. When using the cash accounting method, only payments received are factored into the gross sales figure.