These companies allow a customer to return the sold item within a particular period of time for a partial or full refund. And that refund is deducted from gross sales when calculating gross sales. You may find that your company acquires high deductions, and adjustments should be made to minimize money taken from gross sales. For example, setting higher quality control standards to reduce the risk of damaged products should lower your allowances and returns.
Gross sales are great, but the net sales show how much the company walks away with. The cash flow statement lists the cash inflows and outflows from operating, investing, and financing activities. It is used and then adjusted for accounts receivable and other accounts. Ultimately, you need to look at all the revenue figures to paint of complete picture of your business.
Sales Financial Analysis
It may also happen that the damage is simply cosmetic, and the product works just fine. There are countless resources available online to help you track both gross and net sales. But it’s smart to have a tool that’s built into your CRM platform so that you can view real-time insights — and take immediate action to help hit your sales forecast.
- Easy-to-understand visuals clearly illustrate sales and forecast trends so you’ll never be in the dark.
- For instance, if your sales allowances are high, you might need to address product defects and perhaps look for a new supplier.
- Gross sales are calculated simply as the units sold multiplied by the sales price per unit.
- If you plan to reduce the price of the car by $100, then that is the sales allowance you are providing.
Both factors impact the final amount of revenue generated by a business. Moreover, some items were damaged during shipping, but the customers agreed to keep the products. They only asked for a reduction in prices of the damaged goods, and the company accepted, granting a total of $4,800 worth of price reduction (sales allowances). As a business owner, one of the vital parts of your income statement is the net sales. It’s the basis on which you determine your net profit or net loss, as it accounts for your company’s total revenue within a given period. In order to record sales numbers manually, you’ll need to add your gross sales and then subtract returns, allowances, and discounts from that total.
Differences between net sales and gross sales
Discounts, returns, and allowances make up what is called a contra account. The items recorded in contra accounts are designed to offset the balance of another account. In net sales, the which expression yields net sales for may contra account (deductions) is designed to reduce gross sales. Contra accounts keep your accounting records clean by showing how your company arrived at the net sales figure on reports.
On the other hand, net income is the profit left over after all expenses, including the cost of sales, have been deducted from net sales. This means that net sales are the result of gross sales minus any reductions, while net income takes into account all expenses to determine the overall profit of the company. Since net sales account for the “losses” incurred from returns, allowances, and discounts, it helps you understand potential issues in your sales offerings. Gross sales refer to the grand total of all sales made by a company over a specific period. It excludes all allowances, discounts, or other expenses incurred in the same period.
