Revenue is among the most important financial metrics on the income statement and in comparative financial statements, but it’s not always straightforward to analyze. There is a difference between gross sales and net sales, and these differences give leaders insight into the efficiency and effectiveness of the sales and marketing process.
What are Gross Sales?
Gross sales are often referred to as top-line revenue. This simply means that all sales, regardless of the payment method, are considered gross sales. It is important to note, though, that gross revenue will vary between accrual and cash basis financial statements. Under accrual accounting, different revenue streams may be listed separately in detailed income statements. However, all gross revenue is typically aggregated in a single line item. Also, all discounts and allowances are not included in gross sales.
Calculating Gross Sales
The formula for calculating gross sales is a simple one. In accrual accounting, all invoiced sales are summed to calculate gross sales. It is simply an aggregation of all know sales within the accounting periods under examination. While conceptually simple, the calculation and reporting of revenue is of paramount importance. This is especially true when reporting gross sales to the Internal Revenue Service or another governmental tax authority.
What are Net Sales
Net sales are gross sales reduced by sales discounts, allowances and returns. Sales discounts are typically a percentage of the gross price and are offered as incentives for purchasing a product or service. Allowances and returns have to do with customers returning a product due to improper shipping or defective goods. Net sales are typically displayed below gross sales but above cost of goods sold or cost of sales.
Calculating Net Sales
The formula for calculating net sales is relatively simple. Netting discounts, allowances and returns against gross sales provides the figure. However, it is incumbent upon bookkeepers and accountants to track discounts, allowances and returns in an accurate manner. The process of calculating these figures may take maintaining detail reports, and other evidence, to present during the course of interim or annual audits.
Difference Between Gross and Net Sales
The difference between gross sales, which is all revenue collected, and sales net of discounts, allowances and returns goes beyond the math. While an organization can collect sales, large numbers of discounts or returns can eat away at profit margins and make operations less tenable. It’s critical for leaders to manage net sales and minimize discounts and returns whenever possible. Otherwise, the viability of a business may be put in jeopardy over the long run.
Gross and net sales are important elements of the income statement and give leaders the insight needed to make better business decisions. Large differences between gross and net sales indicate inefficiencies in the sales and marketing process. Knowing the difference between sales figures is imperative for steering business in the right direction.