How To Calculate Net Sales – A Step By Step Guide
May 18, 2023
How To Calculate Net Sales?
When accounting for a business or making its income statement, you need to put the net sales value in the income statement. But when it comes to calculating it, you might be wondering how to do so.
Usually, net sales reflect the amount a company has generated in sales after accounting for the sales returns, discounts, and allowances.
So, if you want to learn how to calculate net sales, go through the simple steps provided in this article.
What Are Net Sales?
Another important metric listed in the income statement and the financial statement of a company is net sales. It describes the total number of sales after the deduction of allowances, sales returns, and discounts.
Net sales are important aspects of the income statement. The net sales are mentioned in the income statement of a business and are a crucial part of the financial statement at the end of the year.
You will usually see the gross sales report listed in the income statement, followed by the discounts and other deductions. Then, below it, the net sales report should be mentioned. Depending on how a business is run, the net sales can be calculated quarterly or yearly.
The net sales data of a company includes different key aspects that can affect it. Here are the key elements you need to know about the net sales of your company –
- Allowances: if a customer finds any issue with their purchase and still decides to keep the product, the company can issue a partial refund or sales allowances.
- Discounts: Another great way of boosting a company’s sales is through the price reduction on the products. Also, the net sales can get affected by the special discounts for early payments.
- Sales Return: When the product quality does not match the customer’s expectations, the customer can ask for a refund. Refunds to debit and credit cards for the COGS can change the sales number and affect the valuation of the sales.
- The sales tax is part of the gross sales, but it does not get included in the net sales.
What Is The Net Sales Formula?
Previously, we talked about how to calculate the gross sales of a company. Now, here is the formula for calculating the net sales –
net sales = gross sales – (return values + discount losses + sales taxes + allowances).
When calculating the sales and profit transactions, the net sales formula is simple to understand and use.
When calculating the net sales of a company, you have to subtract every factor that goes into sales beyond the production from the entire sales. In simple words, the net sales suggest the amount that remains after all the goods are sold, and the debts are paid off.
When calculating the net profit of a company, the formula takes another step and deducts the entire expenses from the entire revenue.
How To Calculate Net Sales?
Now that you know about the gross sales and have data regarding the discount losses, sales taxes, allowances, and return values, you are ready to calculate the net sales data of the company.
Here is the step-by-step formula for calculating the net sales of a company –
Step 1
First, you will need to whether information about the gross sales of the company you are calculating gross sales for. It is the total revenue your company has generated within a period of time.
This period can be a week, month, or s year. The total amount of sales includes all cash purchases, credit/debit card purchases, and gift card purchases. Remember, you must gather the sales amount without adjusting for any discount, sales, or returns.
Step 2
Now that you have your gross sales, you have to calculate the sales returns for the business products returned by the customers. When calculating the sales return, you have to sum the amount your company has returned for specific product purchases. This should be done based on the period you are trying to track net sales for. You must calculate both partial and full refunds.
Step 3
Companies usually offer their customers different discounts and allowances. The allowances are given when the customer decides to retain damaged products without returning them. Due to product damage during transportation, businesses offer their customers with allowances. You need to make a sum of the total allowances a business offers to their customers within that time.
Step 4
Businesses often reduce the price of their products to boost sales. They also do it when they are selling their old stocks. You should also calculate the total amount you have reduced for sales boosts during this time frame.
Step 5
Once you have measured all the previously mentioned statistics and data, you are ready to apply the net sales formula and calculate the net sales.
How To Calculate Net Sales: Example
Let’s say that you are calculating the net sales for a small business that manufactures and sells plastic bottles. You are calculating the gross sales of the company for a quarter.
Let us assume that the gross sales of the company is $55,000. The company also had to pay $500 in refund for the products that customers returned within that time period.
Let’s also assume that the company paid $500 more in allowance charges. Also, the amount provided by the company as a discount is $1500. If you take these data and apply the net sales formula, you will get the net sales information.
- Gross sales: $55,000
- Allowances: $500
- Returns: $500
- Discounts: $1,500
If we use the formula, we will find something looking like this –
Net Sales = $55000 – ($500 + $500 + $1500) = $52500
Read More: Tips For Improving Sales Team Morale
Final Words
Net sales are important metrics of a business’s financial statement (income statement, more precisely). This article offers simple details on net sales and offers a step by step guide on how to calculate net sales. Once you go through it, you will have a clear understanding of net sales and how it works.
However, if there are other related questions you want us to answer, please let us know through the comment section below.
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