How Do You Calculate Net Sales?

Gross sales is total sales revenue from all products and services, excluding any sales tax payments. The net sales definition is gross sales minus sales returns, sales discounts and sales allowances. These accounts are typically found on the income statement underneath the "gross sales" line item.

Tip

Calculate net sales by finding the figure for gross sales in a specified period, then deduct sales returns, sales discounts and sales allowances.

Gross sales revenue is the total amount of sales from products, goods and services made during the accounting period. Sales revenue is the total purchase price paid by the customer minus sales tax. Any sales tax on a transaction is recorded in a separate liability account to keep track of sales tax owed to the state. For example, if a company had sales with a total purchase price of $650,000, and $50,000 was sales tax, gross sales revenue for the period is $600,000. That does not represent the amount in the company's bank account, however, as some sales may have been returned or offered at a discount.

Sales returns are displayed under gross sales and deducted to calculate net sales. Sales returns are typically recorded using an allowance method. Under an allowance method, the company estimates how many sales returns will happen during the year and book an allowance. For example, say the company reviews historical accounting data and determines that approximately 1% of purchases end up being returned. If the company has $600,000 in sales revenue for the period, it will adjust the sale returns allowance account to $6,000.

Net sales are also reported minus any sales discounts. Businesses regularly offer customers a small discount for paying invoices early. For example, a company may say that a payment is due in 30 days but will discount the balance by 2% if the customer pays within 10 days.

Sales discounts are either recorded under the gross sales discount method or the net method. Under the net method, the business assumes all customers will always take the discount and will reverse the discount account only if the customer misses the deadline. Under the gross method, the business records a sales discount only if the customer does in fact pay early. Either way, the balance of the sales discount account reduces net sales.

Any sales allowances incurred during the period are deducted from gross sales to arrive at net sales. Sales allowances are discounts provided to customers on a one-off basis because of a quality or service issue. For example, a retailer may offer a customer a discount if she discovers a defect in a piece of the clothing she wants to purchase. Sales allowances are recorded in a contra-revenue account when the discounts are offered.

Given that the formula for calculating net sales is gross sales minus sales returns, sales discounts and sales allowances, it's relatively easy to calculate. For example, the gross sales for your business might be $10,000 for one month. To calculate the net sales, you would deduct your sales returns. If your sales returns were 1% of your gross sales, then you would deduct $100, for a total of $9,900.

Next you would adjust for sales discounts, depending on your recording method. If you use the net method and your customers took advantage of $500 worth of discounts during the month, you would be left with $9,400. Finally, you would deduct sales allowances. If you and your team provided $200 in sales allowances during the month, you would subtract that, leaving you with net sales for the month at $9,200 ($10,000-$100 in sales returns-$500 in sales discounts-$200 in sales allowances).