Net Sales vs Gross Sales

Your company, say 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. If you want to know the difference between net sales vs gross sales in accounting terms, then you have come to the right place.

Gross Sales

Gross sale 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

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". Now let's see how we calculate net sales.

• First you add up all your income to find out your total gross sales. Include the cash and credit card receipts as well.
• Then you 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.
• This is the amount which is left after deducting returns, cancellations and bad debts from the gross sales.
• 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.