In accounting terminology, "gross" means "before any deductions." So, when you calculate gross sales, you're looking at the overall sales for your business that haven't been adjusted to include discounts or customer returns. The metric is significant for retail businesses that need to file a sales tax return.
Understanding Gross Versus Net Sales
Gross sales are the total of products that your business has sold during a particular period. It's a headline number that does not reflect all the expenses you have incurred to make the sale such as staff costs and shipping, or the fact that some customers returned their goods and received a refund or discount. Net sales, by contrast, is a number that reflects all discounts, returns, refunds and other reductions in the price paid by customers.
Gross sales can be misleading since the figure may overstate the amount of sales revenue, especially if you give a lot of refunds or discounts. As such, it's not an especially useful number. Net sales is a more accurate reflection of the company's top-line sales revenue, and it's common to see a net sales presented on an income statement, where the gross sales and deduction amounts are combined into a single net sales line item.
Gross Sales and Sales Tax Reporting
Gross sales are essential to the reporting of sales tax. For retail businesses that charge sales tax, the price paid by the consumer includes the unit price of the product together with applicable sales tax – both state and local. However, sales tax is not revenue to your company and does not form part of your gross sales. Instead, it is money that you collect on behalf of the city and state for remittance at some future date. Sales tax does not form part of your gross sales. As such, you should record all sales taxes collected as a liability rather than as sales revenue.
Calculating Gross Sales When There's No Sales Tax
To calculate gross sales where there's no sales tax, you only need to total your sales invoices or receipts for a specific period. So, if your gardening business made $700,000 in sales for the year, you would record this as gross sales on your sales tax reporting. It's that simple. The key thing to remember is that gross sales are not the same as net sales. If you offered $50,000 worth of discounts throughout the year to seniors or new customers who presented a coupon, your net sales would be $650,000, but your gross sales would remain at $700,000.
Deducting Sales Tax to Find Gross Sales
It's a bit more complicated when your sales receipts include sales tax. To figure out the gross amount less the sales tax, divide the receipts by 1 plus the sales tax rate. So, if the sales tax rate is 7 percent, divide the total amount of the receipts by 1.07. For example, suppose that your total amount of sales receipts including a 7 percent sales tax is $52,500. The gross sales amount will be $52,500 divided by 1.07, or $49,065. You generally will have to provide the state with the gross sales figure when filing your sales tax return. The sales tax due will be 0.07 x $49.064 = $3,435. To double check your figures, you can reverse the calculation: $49,065 (gross sales) plus $3,435 (sales tax) equals $52,500 (total receipts).
Jayne Thompson earned an LL.B. in Law and Business Administration from the University of Birmingham and an LL.M. in International Law from the University of East London. She practiced in various “Big Law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com.