Net sales, or revenue, is the top line on a company's income statement. It is calculated by subtracting any discounts, allowances or returns from revenue generated during the reporting period.
Calculating net sales as opposed to total revenue allows a company to monitor lost revenue opportunities. Assume a company generates $100,000 in total revenue in a period, but has discounts and allowances of $10,000 and returns of $5,000. Its net sales are $100,000 less $15,000, or $85,000. Cost of goods sold is then subtracted from net sales, often recorded as "Revenue" on an income statement, to determine gross profit.
Some companies also itemize sales during the period into major categories on the income statement, such as "product sales" and "service sales." This slightly more detailed look offers more insights on sales activity. Improving net sales, or top-line results, is necessary for a company struggling to generate profit.
