Definition: Net sales are the portion of a firm’s revenues that remain after deducting the allowances for any missing or damaged goods, returns, and the sales discounts. In other words, it’s the remaining sales after all returns, discounts, and allowances are removed from the gross number.
What Does Net Sales Mean?
What is the definition of net sales? The gross sales represent the total income a firm earns during a specified period, usually quarter or year, and it includes all the cash, credit card, debit card and trade credit sales performed during the period, including the sales allowances and sales discounts.
At the end of the accounting period, firms calculate the total sales allowances and the total sales discounts and subtract them from the gross sales to determine the net sales. This is the amount of sales that the firm actually receives from customers. This figure is typically reported on the income statement.
Let’s look at an example.
Example
Company X is a retail company that sells televisions. The company is a leader in the field and has a large customer base. However, the last month, it has received a defective batch of merchandise, which has forced the company to give a full refund to some customers and a discount to others.
The company’s accountant wants to calculate the net sales formula as the company is about to release its quarterly financial statements. The accountant collects all the invoice that refer to allowances and discounts as follows:
- Customer returns: $98,000
- Damaged merchandise: $103,000
- Discount 13% at an invoice of: $225,000
- Discount 8% at an invoice of: $85,000
- Damaged merchandise: $78,000
- Customer returns: $62,550
- Discount 14% at an invoice of: $234,800
- Damaged merchandise: $52,000
Therefore:
Total sales allowances = $98,000 + $103,000 + $78,000 + 62,550 + $52,000 = $393,550
Total sales discounts = $225,000 x 13% + $85,000 x 8% + $234,800 x 14% = $29,250 + $6,800 + $32,872 = $68,922
The company’s gross sales for the quarter are $852,313.
Therefore, the net sales for the quarter are:
Net sales = Gross sales – total sales allowances – total sales discounts = $852,313 – $393,550 – $68,922 = $324,628
Summary Definition
Define Net Sales: Net sales revenue means the amount of gross sales left over after all discounts, damaged goods, returns, and allowances are subtracted.
