This video shows the difference between Gross Sales and Net Sales. Gross Sales is the sales revenue of a company before accounting for any sales discounts or sales returns and allowances. Sales discounts and sales returns and allowances are subtracted from Gross Sales to obtain Net Sales. Thus, the formula for computing Net Sales is: Gross Sales – Sales Discounts – Sales Returns and Allowances = Net Sales
Gross Sales vs Net Sales:
You might see “Net Sales” instead of “Sales” at the top of an Income Statement. Net Sales is the company’s sales revenue after subtracting sales discounts, sales returns, and sales allowances. Gross Sales is the company’s sales revenue before any of these subtractions have been made.
Here’s an example:
Gross Sales 800,000
Sales Returns (20,000)
Sales Allowances (10,000)
Sales Discounts (40,000)
Net Sales 730,000
When you’re computing a financial ratio and it requires sales revenue, or if someone asks you what the total sales revenue was for a company, you typically want to use Net Sales instead of Gross Sales.
In case you’re wondering:
- Sales returns occur when a customer returns a purchase (“I don’t like this computer, it has a picture of an apple on it”)
- Sales allowances occur when the company reduces the price because a customer received defective merchandise (“these shoes I ordered fit well, but they smell like wet dog”)
- Sales discounts occur when customers receive a reward for paying their bill early (“I paid you what I owe you and didn’t make you wait 6 months, aren’t I just wonderful?”)