Net sales is an accounting element that represents the sum of all sales made by a company of a good or service, whether in cash or on credit, discounting returns, bonuses or reductions for commercial discounts.
Therefore, they are income for the companies resulting from their activity, discounting effects that reduce the gross base.
Net sales are a very important element of a company’s income statement , and serve to assess the financial health of that company, taking into account whether they are recurring or not. At the accounting level, it is defined as the difference between Gross Sales and returns, discounts and bonuses for clients of doubtful collection.
Net sales
gross sales – (returns + discounts + discounts for customers of doubtful collection)
Example of net sales
Let us suppose an example in which a company sells products for a value of 1,000,000 euros, of which customers return 10% and also discounts of 5,000,000 euros are granted.
Net sales = Gross sales – (returns + sales) = 1,000,000 – (100,000 + 5,000) = 895,000 euros
It is important not to confuse net sales with net income. Net income is calculated as the difference between net sales and manufacturing costs, personnel costs, operating expenses, and other expenses.
Net income = Net sales – manufacturing costs – personnel costs – operating expenses – other expenses
Finally, as mentioned above, returns and sales allocations are very important when considering the calculation of Net Sales. If a customer buys too much inventory or receives it damaged, they could return it for credit. In this way, the merchandise would be a sales return. There are some strategies where companies offer their clients certain advantages, such as a good point of sale for that merchandise or an advertising assignment. These advantages are also known as sales discounts.
Net sales in the income statement
Net sales is the starting point of the income statement:
Income statement |
Example |
| Net income or sales | 100 |
| – Direct costs of the goods sold | -fifty |
| Gross margin | fifty |
| – General, personnel and administrative expenses | -twenty |
| EBITDA | 30 |
| – Amortization and provisions expenses | -5 |
| Profit before interest and taxes (BAIT) or EBIT | 25 |
| + Extraordinary income | one |
| – Extraordinary expenses | -two |
| Ordinary result | 24 |
| + Financial income | two |
| – Financial expenses | -3 |
| Profit before tax (BAT) or EBT | 2. 3 |
| – Corporation tax | 7 |
| NET PROFIT OR PROFIT FOR THE YEAR | 16 |
