In accounting and finance, net sales are considered as operating revenues which are earned by a certain company for providing its services or selling its products or goods to their customers. It is also defined as the line on an income statement which takes the total sales and then subtracts any deductions. This amount also refers to the sales generated by the company after deducting the allowances for damaged or missing goods, returns and discounts. Also called as 'revenue', net sales are reported directly on an income statement (the company's incomes and expenses within a specific time frame) as 'net sales' or simply 'sales'. This involves bookkeeping, or the recording of financial transactions.
The net sales formula gives a more detailed picture of the actual sales generated by the company, or the money that it will receive. The revenue is booked by the company by the time the goods or services are delivered or done for its customer. When it comes to returns, a good can be returned as stipulated in a company's return policy even after it has been sold.
Returns are not considered as sales, as the customer will get the money back, so it has to be deducted from the gross sales, or the sum of sales within a particular period. Allowances set for missing or damaged goods show the scenarios wherein the goods are damaged during transport or they are not actually what the customers have anticipated. Discounts are also offered, specifically on credit sales wherein the customer pays the amount at an earlier date.
The net sales formula is:
Net Sales = Gross Sales - (Returns, Allowances, Discounts)
- Net Sales = gross sales minus sales returns, allowances and discounts
- Gross Sales = sum of all sales for a specific period
In the computation of the net sales, you must ensure that you enter the sales, returns, discounts, damaged goods and sales taxes that were assessed in a bookkeeping system within a particular year. If a company has more products sold and discounts offered, then the more detailed its bookkeeping system must be. The net sales must also be calculated on a monthly or quarterly basis. Furthermore, a new income statement should be opened for the month or quarter, and this can be done on a spreadsheet program, plus the use of a calculator.