Thrifty consumers (and all sellers) know that the price listed for a product or service is not always the price for which it will be sold. How a business determines the list price or the net price can vary considerably. The list price may be the price recommended by the manufacturer, or it may be the "white label" price tag beneath the sales sticker on the shelf. The net price, on the other hand, is the amount the customer actually pays when the purchase is completed.
The list price is how much an item should normally cost, while the net price is how much the customer actually pays after taxes, rebates, discounts, etc.
The list price for a product or service can often be described as the starting price. Often, for example, it's the price recommended by a wholesaler or distributor, or it may be the MSRP — manufacturer's suggested retail price. It can also refer to the normal price of an item that isn't on sale.
The net price is a bit more complicated. It may be higher or lower than the list price. If the item is on sale, for example, the net price could be much lower. Discounts, rebates and coupons can also reduce the net price. Sales tax and things like delivery or shipping charges can increase the net price. If an item is rare, the net price could also be much higher than the list price.
Differences between list prices and net prices aren't just limited to consumer purchases. Businesses frequently get discounts for bulk purchases or early payment of invoices. They are also charged shipping fees or fees for rush orders, or they may pay a premium if they order a small quantity of items that is below the normal minimum order required by the seller.
To calculate the net sales price, subtract any discounts first to get a subtotal. Then, apply any taxes or fees that need to be added to the cost. Fees may include your own shipping or installation fees as well as fees dictated by the government. A net price formula, for example, could be: net price = (list price) – (discount) + (sales tax) + (fees).
Suppose, for example, you are selling home theater systems. The cost of a TV and surround-sound system has a combined list price of $6,200 in your shop. Because a customer is buying them together, you can give him a 10% discount. However, there is a 7.25% sales tax and a $7 electronic waste recycling fee to be added to the price. After subtracting the discount, you apply the sales tax and add the $7 fee:
- List price: $6,200
- Discount: (620)
- Subtotal: $5,580
- Sales tax: (404.55)
- Recycling fee: (7.00)
- Net Price: $5,991.55
If you give a customer a discount on an item, you can record it as a debit to the sales discounts account and record it as a credit to the accounts receivable account. In an income statement, the sales discounts account is a contra revenue account. It offsets gross sales, reducing the net sales entry since subtracting sales discounts from gross sales gives you net sales for the period.
For small discounts, some businesses choose to forego the sales discount entry and simply record net sales. However, this can be problematic if customers routinely get discounts for things like early payment of invoices. If you record invoices at the end of the month and customers take the discount the following month, then net sales will be reduced for a period different from the one when they were generated.