20 Oct
Gross and net sales are two different ways of tracking how much money a company brings in. These two terms have a lot of overlaps, but they also have many things that set them apart. Look at our article to learn more about these concepts and the key differences between gross sales and net sales!
Table of Contents
What Is Gross Sales?
Gross sales are the revenue generated from the sale of products and services before any deductions are made. These deductions include discounts, allowances, and sales returns. The gross sales figure is used to calculate the company’s gross profit. Gross sales are the total sales of all products and services over a specific period.
Formula;
Gross sale = (Total Units Sold x Original Sale Price).
For example, if a company sold 100 widgets for $10 each, their gross sales would be $1,000.
What Is Net Sales?
Net sales is the total revenue generated from the sale of goods and services after all deductions have been made. It includes money earned from selling products and services minus discounts, returns and allowances. The net sales figure is used to calculate the company’s net profit.
To calculate net sales, you will need the following information
- Gross sales for the period
- Allowances
- Discounts
- Any returns that were received during the period
Formula,
Net sales = gross sale – allowance – discounts – sale return
For example,
Let’s say, from the financial statements of a company ABC we find out the following values;
Gross sale = $100,000
allowance= $100
Discounts = $200
Sale return = $50
To find the net sale of the company, we will subtract allowance, discounts and sale returns from the gross sale,
Net sale = $100,000 – $100 – $200 – $50
Net sale = $99,650
Key Differences Between Gross Sales And Net Sales
| Gross sales | Net sale |
|---|---|
| Gross sales is the total value of all sales made by a company | Net sales refer to the value of sales after deducting discounts, returns, and allowances. |
| It is not included in financial statements | It is included in financial statements. |
| Formula, Gross sale = (Total Units Sold x Original Sale Price) | Formula, Net sales = gross sale - allowance - discounts - sales return |
| Used to calculate sale metrics | Used to measure company’s performance |
| Not relevant to decision-making process | Relevant to decision-making process |
| The company's management does not consider gross sales to identify a company's financial position because it does not provide an accurate picture. | A company's management considers net sales to know the financial position of a company. |
| Gross sale is not dependent on net sale | Net sale is dependent on gross sale |
| Value of gross sale is always higher or equal to net sale | Value of net sale is always less than a gross sale |
- Gross sales is the total value of all sales made by a company, while net sales refer to the sales value after deducting discounts, returns, and allowances.
- Gross sales are typically used to measure a company’s performance, while NS provide a more accurate picture of its profitability.
- GS include all revenue from primary activities, such as the sale of goods and services, while net sales come after deducting allowances, discounts, and sales returns.
- Gross sales include all revenues from sales. Therefore, it will always be equal to or higher than net sales. In contrast, NS can never be higher than gross sales.
- Companies often use different accounting methods for calculating gross versus net sales, so it is essential to understand how each is used to compare companies.
- When analyzing a company’s financial statements, it is essential to look at both sales to get a complete picture of its overall performance.
Conclusion
In conclusion, there is a crucial difference between gross sales and net sales. Gross sales refer to the revenue produced from the sale of services or products before any deductions are made. In contrast, net sales are the total revenue generated after deducting discounts, allowances, and sales returns. As a business owner, it’s essential to understand the distinction between these two terms to track your company’s performance accurately.
Content writer at Invyce.com
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