What Are Net Sales On Income Statement? (Formulare and Calculation)

Overview:

In the income statement, net sales or total sales revenues are the same things. Net sales during the period are the gross sales after deducting sales return and sales discount that entity made to customers during the period. The total net sales value during the period usually is present in the income statement, and the notes to these amounts are clarified in the noted financial statements.

In the income statement, you might see the entity present total gross sales, sales return, sales discount, and total net sales during the period. This is to ensure that the users of financial statements clearly understand the entity’s performance compared to competitors.

Some entities might present the breakdown in the noted, and some entities might not show the detail.

Recognition:

From an accounting perspective, net sales or sale revenue are the same. Recognition of net sales in the income statement is when risks and rewards, and control related to the goods or services that the company sells are transferred from sellers to buyers (customers).

Net sales records in the income statement are the net amount that an entity is expected to receive from the sales of goods or services.

IAS 18 is the accounting standard that an entity should follow in recording net sales in the income statement if entity financial statements follow or use the IFRS financial framework.

Net Sales or total revenues could recognize in the income statement as long as the entity could prove that there is a probable future economic benefit associated with the items of sales that will flow to the entity, and those sales could measure reliably.

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For example, the sellers that transfer all kinds of risks associated with the goods to buyers are responsible for all kinds sociated with. The goods that sellers sold to buyers must be measured reliably in the form of monetary.

How to Calculate Net Sale of the Company During the period?

To calculate net sales, you will have to know certain information related to the company. Those include the nature of products or services that the company is selling. The selling price. The company’s policies on sales return, sales discount, sales allowance, and so on.

This is assuming that you are the one who calculates the company’s net sales from the raw information.

Yet, if you are the reader of the company’s financial statements and you want to see how much is the net sale that the company generated during the period that you are reading, then you will have to go to the company’s income statement and see the sales revenues that present in the income statement. You can’t see the net same in the balance sheet, statement of cash flow, and statement of change in equity.

Now, let’s see how the formula calculates the net sales.

Formula:

Net Sales = Gross Sales – (Sales Discount + Sales Return + Sales Allowance)

Where,
  • Gross Sales is the total sales value or amount before any disount or allowance. This is th total sales regardless of payment that the customers are willing to pay.
  • Sales discount is the amount of discount that the company is offered to the customers. The sales discount is depending on the company policies where the factors normally related to the nature of products or services, the amount that customers are purcashing and the payments terms.
  • Sales return is the amount of goods that the customers returned to the company as the result of certains factords including the quality of goods are poor, wrong products types or other conditions. Where the return of the goods are meeting the company’s policies, the company will return the cash or exchange of the products. These amount should be reducted from the gross sales.
  • Sales allowance is related to the conditions where products are found to be defective or damaged goods and base on the company’s policies, the company will product the allowance interm of money back to the customers.
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Example:

For example, ABC company sells goods to its customers in the gross sales amount of USD500,000 from 1 January to 31 December 2020. During the period, the company incurred a sales return amount is USD200 and a discount amount of USD400 as well as a sales allowance amount of USD500.

Based on the information provided above, how much is the company’s net sales for the period from 1 January to 31 December 2020?

Now let’s calculate together,

Here is the summary of information from the company;

  • Gross Sales = USD500,000
  • Sales Retunr = USD200
  • Sales Discount = USD400
  • Sales Allowance = USD500

Here is the formula,

Net Sales = Gross Sales – (Sales Discount + Sales Return + Sales Allowance)

So we get,

Net Sales = 500,000 – (200 + 400 + 500)

Now bring your calculator and get the answer yourself

What Are the Different Between Sales Vs. Gross Sales?

The main difference between gross and net sales is that gross sales are before deducting the sales discount, sales return, and sales allowance.

The company’s management typically wants to assess and analyze the variant between gross sales and net sales by types of products and services, the location, period, salesperson, and so on to see the performance of reach products, site, and salesperson.

Management then will need to perform a deep analysis and investigation to find the root causes and fix the issue that leads to high sales returns.

Is Net Sales and Credit Sales are the Same?

Credit sales are the total that a company makes on credit, excluding cash sales. Net sales are different from credit sales since net sales could include both credit and cash sales. The definition of credit sales is provided based on the nature of payments that the customers are willing to pay or committed to pay regardless of sales discount, return, or allowance.