Usually, how to calculate net sales comprises of the total amount of revenue reported by the company in the income statement, which means that all related sales and discounts are combined into one item. Total sales must be shown separately from net sales, as there can be significant discounts from total sales. If this discount is hidden in a financial statement, the statement will miss basic information on the quality of sales transactions.
The Total Sales formula tells you how much the company has achieved in total sales, but it doesn’t tell you how much the company has already made in the profit. Total net sales is an indicator that will give you a clearer picture of the company’s performance because it represents sales funds returned to the customer after the transaction. Reliance on total sales alone can push analysts to overestimate the company’s financial position.
It is best to report the total sales, followed by all the discounts granted for the sales and then insert the net sales number. Show your sales this way clearly when there is a change in sales discounts, very large marketing discounts, and other changes in sales quality. The notes to the financial statements should explain any reason behind the significant sales discounts. If the business contains only one line item called “sales,” this number should refer to net sales.
Returns And Allowances
After completing the sale, the transaction has not ended. Businesses must consider returning the product, damaged goods and customer discounts. The company may earn $ 150,000 in sales, but it could end up losing $ 25,000 of that money due to defective products or incomplete transactions. To calculate this, you can calculate net sales by subtracting returns and allowances from the gross profit. Return, of course, means the value of any products returned by customers. Allowances, in this case, are allowances for discounts on the products that are sold. This gives the company plenty of room for promotions and private sales. For a car company, they may have allowances for a questionable portion that can be called up. It basically allows the company to precaution the defective goods. Alternatively, the automaker could choose not to make low-quality products in the first place.
Net Sales Against Revenue
Total sales revenue is the total amount of sales of products, goods, and services made during the accounting period. Sales revenue is the total purchase price the customer pays minus sales tax. Any sales tax on a transaction is recorded in a separate liability account to track the sales tax owed to the country. For example, if the company has sales with a total purchase price of $ 650,000, and the sales tax is $ 50,000, then the total sales revenue for this period is $ 600,000. This does not represent the amount in the company’s bank account, however, some sales may have been returned or offered at a discount.
Accounting For Sales Discounts
Net sales are also reported minus any sales discounts. Companies regularly offer customers a small discount to pay bills early. For example, the company might say that the payment is due within 30 days but it will deduct the balance by 2% if the customer pays within 10 days.
Sales discounts are recorded either under the gross sales discount method or the net method. Under the net method, the company assumes that all customers will always get the discount and will only reflect the discount account if the customer misses the deadline. According to the overall method, the business records a sales discount only if the customer is actually paying early. In both cases, the sales discount account balance reduces net sales.
Accounting For Sales Bonuses
Any sales provisions incurred during the period are deducted from total sales to arrive at net sales. Sales allowances are discounts offered to customers on a one-time basis due to a quality or service problem. For example, a retailer might offer a customer a discount if they discover a defect in a piece of clothing they wish to purchase. Sales allowances are recognized in the income account when the discounts are provided.
How To Calculate Net Sales
Net sales show your company’s revenue after discounts like discounts, returns, and allowances that are deducted from your total earnings. It differs from total sales, which represent total sales before any discounts during a given period. Finding net sales will help you create an income statement, a valuable planning tool for forecasting your income and expenses.
By comparing net sales to total sales, you can identify quality issues that may exist in your business. You can see how much the product is damaged or returned and adjust your operations accordingly. This difference also highlights whether the discounts you offer help or harm your earnings.
CONCLUSION
The income statement is a step-by-step guide that reveals how much income your company makes and where to go. The net sales figure is what remains after all sales discounts, returns and allowances are deducted from your total sales.
If the difference between total sales and net sales exceeds your industry standards, you may want to know the reason. You might either give your customers a big cut in sales or you might have an extra amount of returned merchandise. Comparing your monthly income data can help you identify and solve problems before they become unmanageable.
