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Net sales is an accounting element that represents the sum of all sales made by a company of a good or service, either in cash or on credit, discounting returns, bonuses or reductions for commercial sales. Therefore, they are income for companies as a result of their activity, discounting effects that reduce the gross base.
Net Sales, are a very important element of the income statement of a company, 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 doubtful customers.
Net sales = gross sales – (returns + discounts + bonuses for doubtful customers)
Example of net sales
Let us assume an example in which a company sells products for a value of 1,000,000 euros, of which customers return 10% and also discounts are granted worth 5,000,000 euros.
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 expenses, operating expenses and other expenses.
Net income = Net sales – manufacturing costs – personnel expenses – operating expenses – other expenses
Finally, as we mentioned earlier, returns and sales assignments are very important when considering the calculation of Net Sales. If a customer buys too much inventory or receives it damaged, he could return it by credit. In this way, the merchandise would be a sales return. There are some strategies where companies offer their customers certain advantages, such as a good point of sale of 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 goods sold | -50 |
| Gross margin | 50 |
| – General, personnel and administrative expenses | -20 |
| Earnings before interest, tax, depreciation and amortization (EBITDA) | 30 |
| – Amortization expenses and provisions | -5 |
| Profit before interest and taxes (BAIT) or EBIT | 25 |
| + Extraordinary income | 1 |
| – Extraordinary expenses | -2 |
| Ordinary result | 24 |
| + Financial income | 2 |
| – Financial expenses | -3 |
| Profit before tax (BAT) or EBT | 2. 3 |
| – Corporation tax | 7 |
| Net Profit Or Financial Year Results | 16 |