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 when it comes to entities such as retail business. There is a difference between these types of sales. Gross sales accounts and net sales, and their differences give entrepreneurs insight into the efficiency and effectiveness of the sales and marketing process. Credit policies and other business operations can also be analyzed, based on differences between gross and net figures.
What Are Gross Sales?
Gross sales revenue is often referred to as top-line revenue. This simply means that all sales transactions, regardless of the payment terms or method including a credit card, debit card or cash, are considered gross sales. It is important to note, though, that gross profit 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 or separate line item. Also, all discounts and allowances or deductions are not included in the total amount of sales or gross sales.
Calculating Gross Sales
The formula for calculating the gross sales figure 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 or total sales reduced by sales discounts or a customer discount including early payment discounts, allowances and deduction of 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 to the seller due to improper shipping such as late shipping or goods with defects. 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 product returns against gross sales provides the figure. However, it is incumbent upon bookkeepers and accountants to track discounts, allowances and returned goods 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 sales 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 the net sales number and minimize discounts and the total worth of returns whenever possible. Otherwise, the viability of a business may be put in jeopardy long-term.
Gross and net sales revenue are important elements of the company’s income statement and lead to better decision-making by the sales team, especially when based on bottom line items such as sales revenue, operating expenses and net income. The key 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 and increasing the company income. These differences of the sales processes can also be illustrated with the use of infographics or a comparison table for a more visual approach in determining the integral part of the financial analysis of the general business income.