Net Sales Defined
What is net sales revenue? Net sales revenue refers to a company’s total sales revenue in a given fiscal period after subtracting certain items. These items include returns, allowances, and discounts. Net sales revenue is in contrast to gross sales revenue. Gross sales revenue is not adjusted for returns, allowances, and discounts. The revenue shown in the top line of a company’s income statement is net sales revenue. Net sales revenue is also called net revenue, net sales, or the top line.
Net Sales, Gross Sales
Companies earn revenues by delivering goods and rendering services to customers. Call the total amount of all revenues generated by a company in a given fiscal period the gross sales revenue. Gross revenue, however, is not always the most accurate representation of a company’s sales. Oftentimes customers will return damaged goods, receive a discount from the typical selling price, or demand a refund for some other reason. The revenues depicted on a company’s income statement would be more accurate if it took these items into consideration. And in fact, that is how we get to net sales revenue.
Net sales revenue is simply gross sales revenue less returns, allowances, and discounts. These deductions from gross sales revenue are called contra-revenue accounts, because they are subtracted from the sales figure. While sales and revenue accounts are increased by credits and decreased by debits, contra-revenue accounts are increased by debits and decreased by credits. Also, refer to contra-revenue accounts as contra sales accounts.
Sales returns refer to products that were sold and delivered to customers and then subsequently returned by the customer because of a lack of satisfaction with the product for one reason or another. When an unsatisfied customer returns a product, the company must give the customer his or her money back. Account for this refund in the company’s revenues; include the sum of all actual or anticipated refunds in the net sales revenue figure.
Sales allowances refer to refunds provided after-sale to customers because of damage to the products, missing products, or minor defects in the products. These issues cause the customer to be dissatisfied with the product. Because of these inadvertent flaws in the product and in order to retain the customer’s business, the company may provide refunds for sales allowances. You must then subtract the amount of the sales allowances from gross sales revenue to yield net sales revenue.
Sales discounts refer to reductions in sales prices to customers based on discounts, such as 2/10 net 30 credit terms. Such terms are designed to motivate customers to pay invoices sooner rather than later. Selling companies then offer discounts to customers who are willing to make early payments. Then subtract these discounts from gross sales revenue to yield the net sales revenue figure.
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