The stockholders want to know about the company’s sales so they know if their investment is safe. If they see the company’s revenues plummeting, they may consider selling their stock to cut their losses. On the other hand, if they see an increase in sales, they may choose to hang onto the stock longer before selling. The following section showcases how to calculate net sales through these steps. Tracking net sales might be easy, but tracking metrics that affected it, factors that caused a surge or drop in sales, can only be possible if you track metrics on a regular basis.
If applicable to the scenario, another adjustment factor to gross revenue is allowances, which are closely related to discounts. In contrast, revenue is not recognized under cash basis accounting until the company has received the actual cash payments from the customer. While gross sales vs. net sales are terms that may be more familiar to accountants and investors, knowing what these mean as a salesperson or sales manager is still vital. It can give you a strong indicator of business performance and help identify any potential issues before they become serious problems. Your gross sales might look great, but if your business is getting a lot of returns, your net sales will show it. Gross sales allow you to measure the total amount of revenue made by your sales team, whereas net sales are a better measure of performance, sales tactics and product/service quality.
A seller will debit a sales discounts contra-account to revenue and credit assets. The journal entry then lowers the gross revenue on the income statement by the amount of the discount. Allowances are less common than returns but may arise if a company negotiates to lower an already booked revenue. If a buyer complains that goods were damaged in transportation or the wrong goods were sent in an order, a seller may provide the buyer with a partial refund. A seller would need to debit a sales returns and allowances account and credit an asset account. This journal entry carries over to the income statement as a reduction in revenue.
- That’s the cost of materials, assembly, packaging, distribution, facilities, equipment, marketing, and all the other overhead that go into making the goods.
- Net sales equate to how much money your business accumulates within a specified time frame after deductions are docked from the gross sales amount.
- If the difference between gross sales and net sales is higher than the industry average, it usually indicates that the company is offering higher discount rates compared to competitors.
- Net sales is the sum of a company’s gross sales minus its returns, allowances, and discounts.
- Allowances are less common than returns but may arise if a company negotiates to lower an already booked revenue.
- Net sales show you how many customers are using your early-payment discount.
- There were some sales returns—a few batches were a little off, so some online customers asked for refunds.
Gross sales are the total sales that are calculated by multiplying the number of units sold by their per-unit price. Net sales are adjusted gross sales after deducting allowances, sales returns, and discounts. Utilize sales tracking or accounting software to calculate gross sales. Track sales allowances as they occur in a daily end-of-day log so it’s Similarities & Differences Between Accounting & Bookkeeping easier to calculate this portion of sales deductions at the end of the month. Gross sales are your total sales for a specific period before accounting for any deductions such as sales allowances, sales discounts, and sales returns. An income statement is a financial statement that reveals how much income your business is making and where it is going.
Cost of Goods Sold (COGS)
Compare your own figures with competitors to see how you’re performing in the marketplace and identify new opportunities and areas of improvement in your existing sales processes. This is where reviewing net sales alongside gross sales comes in handy. For example, imagine that your customer ordered $3,000 worth of your product, but they receive the wrong color. While the product still functions correctly, the customer might ask for compensation given that the delivered goods weren’t as described.
The company had $2,000 in returns, $1,500 in damaged shoes, $200 in missing inventory, and $500 in discounts. These are items that directly reduce the amount of money that comes into the company from the inventory available for sale. When returns and deductions are taken off the gross sales amount, the numbers reveal the true sales or net sales amount.
Net sales allowances are usually different than write-offs which may also be referred to as allowances. A write-off is an expense debit that correspondingly lowers an asset inventory value. Companies adjust for write-offs or write-downs on inventory due to losses or damages. This requires https://adprun.net/bookminders-outsourced-accounting-and-bookkeeping/ a company to make additional notations to account for the item as inventory. Managers, company executives, and other decision makers within a company are also interested in this data. They want to know what direction their company is going so they can properly adjust their strategies.