What is net sales?
After deducting any sales returns, allowances, and discounts from the total revenue generated by a company, we get the net sales. This is an important figure that analysts use to evaluate the company’s performance and growth in its core business.
The formula of Net Sales
Net Sales = Gross Sales - Sales Returns - Allowances - Discounts
Understanding Net Sales
The income statement is a financial report that shows how much profit a company makes from its sales after paying for the costs of producing those sales. The costs of producing sales are divided into two categories: direct costs and indirect costs. Direct costs are the costs that can be easily traced to a specific product or service, such as the cost of materials and labor. Indirect costs are the costs that cannot be easily traced to a specific product or service, such as the cost of rent and utilities. The direct costs section of the income statement reports the company’s sales, which is the amount of money left after deducting all of the direct costs.
Net sales are the amount of revenue that a company keeps after deducting the sales returns, allowances, and discounts that it gives to its customers. Not all companies and industries use net sales because they may have different ways of calculating their revenue. Net sales affect the gross profit and gross profit margin of a company, but they do not include the cost of goods, which is another foremost factor for gross profit margins.
Some companies may disclose their gross sales and net sales separately in the direct costs section of the income statement, while others may only report their net sales as the first line item. Net sales do not include the cost of goods sold, general expenses, and administrative expenses, which have different impacts on the income statement margins.