Meaning and definition of Net Sales
Net sales refer to the amount of sales engendered by a business after deducting the returns, taxes like VAT, allowances for damaged or missing goods, and any discounts allowed. The sales number mentioned on the financial statements of a company is the net sales number, replicating these deductions.
As expressed by Investopedia, deductions from the gross sales are indicated in the net sales figure. Thus, estimating the net sales provides a more accurate picture about the actual sales engendered by the company, or the money expected to be received. A business entity books its revenue once the product or service is delivered or performed for the consumer. In the case of returns, however, even after a product has been sold out, it can often be returned under the return policy of a company. The returned product is, however, not considered to be sale for the money received has to be paid back.
Calculating net sales
The procedure for calculating net sales is as follows:
1. Sum up the income received from different sources to estimate gross sales, also counting cash and credit card receipts.
2. Subtract returns. It is inevitable that a business will experience some amount of returns. Generally, manufacturers and distributors have an open return policy for retailers. While evaluating net sales, it is essential to maintain a running total of all the returns received over the course of a financial year. Deduct that amount from the gross sales figure.
3. Subtract allowances for damages and losses. These allowances are similar to returns, with one key difference. In situations where items are broken in transit or have a quality issue (like a batch of books featuring warped covers), the consumer will generally accept an adjustment in the selling price rather than returning the item for a full refund. Therefore, after deducting the returns, deduct the amount of any adjustments made to the sales price as the problem is with the goods.
4. Subtract any discounts that have been provided on sales. Calculate the extended discount, if any, provided to the consumers and deduct it from the previous balance thus reaching the net sales.
Start free ReadyRatios
reporting tool now!
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software