How to Calculate Net Sales

The net sales figure subtracts a company's gross sales from returns, allowances, and sales discounts, revealing the owner's earnings. Discover what factors can affect a company's net sales.

What Exactly Is Net Sales?

Net sales are the total amount of revenue generated by a company after accounting for customer returns, discounts, and other deductions. Product-based businesses track sales in a general ledger and measure net sales over a specific time period. This top-line metric is then reported on an organization's income statement.

Gross sales are a company's total revenue; net sales are the amount of sales less the aggregated cost of sales.

What Is the Importance of Net Sales?

Net sales are tracked on financial statements by corporations and small businesses to understand how total revenue translates into net profit. Companies can also use these ratios to adjust labor, production, and ordering costs in order to reduce unit cost and maximize profit.

Profit vs. Net Sales

Net sales are critical in determining a company's profitability. Companies calculate net sales over time to determine how cash flow from revenue translates into gross profit. The accounting period could be a month, quarter, or year, providing the balance sheet with a snapshot of revenue minus cost of sales prices.

Companies can also decide how much of the gross profit margin to keep after reducing operational costs for net income. Profits for business owners are defined by net sales revenue, which can also determine a company's financial viability.

4 Factors That Impact Net Sales

A company's bottom line and net sales values can be influenced by a variety of factors, including:

1. Allowances: If a customer discovers a flaw in a product but decides to keep it, the company may offer a sales allowance or a partial refund.

2. Discounts: A price reduction is an excellent way to increase sales, but special promotions and early payment discounts can have an impact on net sales.

3. Sales returns: If the product quality falls short of expectations, a customer may request a full refund. Refunds to debit and credit cards for cost of goods sold will affect sales figures and net sales value.

4. Sales tax: Accountants must account for sales taxes when calculating the net of a company's sales in spreadsheets. These taxes will be deducted from gross sales but not from net sales.

How to Calculate Net Sales

The net sales formula in profit and sales transactions is simple: net sales = gross sales - (return values + discount losses + sales taxes + allowances).

To calculate net sales, subtract all sales-related factors other than production from total sales. Net sales are the funds left over after selling your goods and paying off certain debts and services. Net profit extends this formula by deducting total expenses, including operating expenses, from total revenue.