What is ‘Net Sales’?
Net sales refer to the total sales or revenue of a company after deducting its gross sales with discounts offered, allowances given, product returned, and products lost. Usually companies indicate their net sales figures, as “net sales” or just “sales”, when they prepare their income statements. This is so because net sales is a more accurate figure of the actual revenue the company earned during a particular period compared with gross sales, which only indicate the overall total sale for a given period without taking into account the possible deductions like discounts or product returns.
There are five basic things that could be deducted from a company’s gross sales to come up with the net sales. One such deduction is ‘company discounts’. These discounts refer to reduction in payments made by a particular customer because of some incentive schemes given by the company. An example of an incentive scheme is a 5 or 10% off given by the company to the customer if payment for goods is made early, like 15 days ahead of the supposed deadline. Although these sorts of schemes will make the company’s revenue smaller, some companies still offer these discounts to make customers pay early and help with operating cash flow.
Another possible deduction to gross sales is “allowances” given by companies. These are price tag reductions for merchandise with minimal defects. “Sales returns” also qualify as a deduction to gross sales and these refer to goods returned by customers which require a refund of payment. “Damaged” goods or merchandise must also be deducted from net sales as these products won’t be bought by customers and maybe won’t even get to the sales distribution area. The last items that may be deducted from gross sales to come up with the net sales are “stolen or missing” goods. Obviously, these goods should be taken out of the inventory record and documented as a “loss” or deduction to the company’s revenue.