How to Calculate Net Sales?Net Sales are part of an Income Statement account that most users and the management monitor regularly to gauge the company’s economic status. Show
Net Profit is the difference between the Total Revenue and Total Expenses. Profit and Loss Statement or Income Statement measures the financial performance of the company. The common line items in the Income Statement are Net Sales (Sales – Sales Returns, Allowances, or discounts), Cost of Goods Sold/Cost of Sales, Gross Margin, Selling and Administrative Expenses, and Net Profit. This article will help you understand what Net Sales are and will also guide you on how to compute Net Sales. What are Net Sales?Net Sales is the amount of total sales less any sales returns and allowances or trade discounts. Net sales make up the initial portion of the Income Statement. Sales returns can be a company policy allowing customers to return the sold item in case of product deficiencies or a wrong quantity of orders delivered. Most of the time, retail stores allow returns of purchased items. A trade discount is an agreement between a manufacturer and a buyer. Such discounts are subtracted from gross sales to arrive at net sales. The trade discount amount is subtracted from the standard to arrive at the actual price which essentially is the amount that the buyers pay. The recording of sales depends on the accounting method used by companies. How to Calculate Net SalesNet Sales is one of the line items included in the Income Statement where expense accounts are also recorded. Such expenses are categorized according to their characteristics which include direct, indirect, and capital expenses. The section where Net Sales are recorded also includes direct expenses to compute the Gross Margin. The concept of net sales does not always apply to all types of industries. Some do not follow the method of Net Sales calculation. To arrive at the Net Sales, the following are subtracted from it: sales returns, sales allowances, and trade discounts. Sales ReturnsSales Returns refer to the return of the sold items to the seller affecting a decrease in sales amount. Some of the reasons for customers to return items are excess quantity, wrong items shipped, defective goods, or mistaken product specifications. There is only a specified period in which the goods can be returned, usually within only a few days. The company may recognize the returned goods as sales returns or deduct the sales return from sales revenue directly. Sales returns affect two accounts – a decrease in cash or accounts receivable (credit) and an increase in Sales Returns (debit). Sales AllowancesSales Allowances are recognized when the price of the goods sold to the customer is below the standard price because of inferior product quality or wrong product specifications. This is recognized when the customers are sent a bill but before they make a payment. The entry to record a sales allowance is by debiting the Sales Returns and Allowances account and crediting the asset account. This entry reduces the Gross Revenue by the amount recorded against the allowance. This should not be confused with write-offs because the latter is recorded as an expense that reduces the asset value and is done before any sale is made. Trade DiscountsDiscount is a strategy to encourage customers to pay earlier than the agreed payment period. The payment term depends on the agreement of both parties. An example of a discount term is 3/10 net of 20. This means that a 3% discount will be given to the customer if the payment is made within ten (10) days of the given 20-day invoice period. Discounts should only be provided when the customer pays early. Companies that aim to mobilize collections offer discounts to customers. Such collections are used for purposes such as payment for business-related expenses, or to decrease the accounts receivable of the company. A sales discount also decreases the gross revenue for the period. The table below shows an example of Gross Sales and the related deductions. Net Sales = Gross Sales – Sales Returns – Sales Allowances – Discount Net Sales = $4,000,000 – $30,000 – $25,000 – $15,000 Net Sales = $3,930,000 Gross Sales vs Net Sales
How to Calculate Net Sales RevenueSales revenue is the total amount of generated revenue through a company’s business operations. But there are times when customers do not pay them in full. As such, a risk of reduction to the total sales may happen. The adjustments can be sales returns, allowances, or trade discounts. The computation of Net Sales will require the following steps:
Gross MarginGross Margin is the difference between the Net Sales and the Cost of Goods Sold. It is the remaining amount after deducting all the direct costs of the production of goods. Gross Margin is the amount before the deduction of other business-related expenses such as selling, administrative, and interest expenses if any. A higher gross margin corresponds to a higher capital earning rate. The formula to compute the Gross Margin is as follows: Gross Margin = Net Sales – COGS Where: Net Sales = Gross Sales – Sales Returns, Allowances, Discounts. COGS = the components of cost of goods sold are direct material, direct labor, manufacturing overhead, etc. One of the salient indicators that a company’s financial status is healthy is the gross margin. It has a major effect on the gross profit retention of the business operation. For Example, the company retains $.30 for every sale generated and has a 25% gross margin every quarter. The dollar amount retained can be used in settling the company’s debts and other expenses. Net Credit Sales FormulaCredit means an amount that is to be paid or received some time in the future. Net Credit Sales are sales generated in selling goods or services to be paid in the specified credit period. There is no involvement of cash in this kind of transaction. Net Credit Sales also follow the concept of sales returns, allowances, or discounts. Net Credit Sales is part of a different financial analysis calculation like the Accounts Receivable Turnover Ratio, Day Sales Outstanding, etc. Net Income vs. Net Sales
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What is the difference between a sales return and a sales allowance quizlet?What is the difference between a sales return and a sales allowance? A sales return is credit allowed a customer for the sales price of returned merchandise; A sales allowance is credit allowed a customer for part of the sales price of merchandise that is not refunded.
What is subtracted from sales to arrive at net sales?Net sales is equal to gross sales minus sales returns, allowances and discounts.
Is sales return a contra account?Sales discounts and Sales returns & allowances:
Sales discounts and sales returns & allowances are contra accounts to Sales and have a normal debit balance.
When a business uses a subsidiary accounts receivable ledger?An accounts receivable subsidiary ledger is an accounting ledger that shows the transaction and payment history of each customer to whom the business extends credit. The balance in each customer account is periodically reconciled with the accounts receivable balance in the general ledger to ensure accuracy.
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