Before starting a company, you should understand the comparison of net sales vs. gross sales. The article below highlights the difference between the two entities.
Understanding the difference between net sales and gross sales will help you understand how much profit your company is earning, or whether it’s going through a loss. Let’s say, your company, ABC Pvt. Ltd. makes bags for women. You sell them in the market, and at the end of the financial year, you would like to know how much revenue your company has got from the sale of your products to the consumers. For this, you calculate the net sales and gross sales of your company. The article below highlights this difference in detail.
- It is the amount that the company receives after selling their products in the market, after deducting the discounts, returns of products by the consumers (if they are not satisfied by the products), deducting the cost of damaged, missing, and stolen products.
- It provides the most accurate calculation of what the company has received or expects to receive in the turnover from sales.
- In other words, net sales considers reductions that are directly associated with the sales of the company’s goods. If you see any financial statement showing the word “sales”, then its “net sales”.
- Gross sales is the total sale the company or the business generates in a given period.
- It does not include the discounts on products, or returns. Nor do they include the operating expenses or payment of taxes.
- Company managers use gross sales to measure changes in the units that were sold and the average selling price of the company’s products from year to year.
- It is the total invoice value of the sales of your company, before deducting the customer discounts, allowances, and returns.
- To find out the gross sales of your company, find the details of the financial statement note that gives all the details of the company’s sales activity for the given period.
- You subtract returns, cancellations, bad debts and any other top line deductions from the gross sales to get the net sales.
Net Sales Vs. Gross Sales
Calculation of Net Sales
- First, add all your income to find out your total gross sales. Include the cash and credit card receipts as well.
- Then, deduct your returns. Now, deduct the allowances for all the damages and losses that you have suffered.
- Deduct the discounts, if you have given any on the sale. If you have given a special discount as an incentive to the consumers, then figure out the total amount of the discount that was given and subtract it from the previous balance (after returns and allowances).
- The final amount that you get now is your company’s net sales.
Significance of Net Sales
- As already mentioned, net sales appear on the financial statements and is a very useful indicator. It gives the actual picture of the company’s financial situation as regards to goods and assets and finance.
Contributing Factors of Net Sales
- Returned goods
- Expired products
- Shrinkage from damaged goods
- Loss of goods
Example of Net Sales
- Assume that a company has sold goods worth USD 50,000. But, goods worth USD 2,000 are damaged/returned, and the company has offered discouts as well, which has been accounted for USD 8,000.The net sales in this case will be: 50,000 – 2,000 – 8,000, which is equal to USD 40,000.
Calculation of Gross Sales
- Gross sales is just a component of the total revenue. Therefore, to calculate gross sales, all you have to do is add the income from all your sources.
- After deducting returns, cancellations, and bad debts from this value, you will get your net sales
Significance of Gross Sales
- It is not a very useful indicator. This is because it does not specify what the company makes by selling goods, it does not consider the deductions and accounts from all sources.
Contributing Factors of Gross Sales
- The total money that comes into the business from various sources and transactions is all that is considered.
Example of Gross Sales
- Going along the lines of the same example, the gross sales will be USD 50,000 only. This term does not take into account any discounts/shrinkage/theft, etc. It solely considers how much was made through selling.
Net sales is the starting point or 100% from which all the other costs are calculated. So, while calculating your company’s sales, always start with the net sales and not with the gross sales. One major difference between the two is that the former is whole, while the latter cannot be reduced further. Besides, you can also learn more about other accounting terms, which will help you in your business.
Net Sales = Gross Sales – (Customer Discounts + Returns + Allowances)
So, now that you know the difference, it will be much easier for you to start off your new company. Just keep the above differences in mind and your account book will give you no trouble.