Difference Between Gross Sales and Net Sales
Gross sales and net sales are both revenue concepts that refer to the income a company generates from its business activities, but they differ in what they include and exclude. Here’s how:
- Gross Sales: This is the total unadjusted sales revenue that a business earns during a certain period before any deductions such as returns, allowances, or discounts are made. It represents the company’s top line revenue and gives a raw picture of sales volume.
- Net Sales: This is the revenue that a business earns after deducting sales returns, allowances, and discounts. Sales returns are refunds given to customers for returned items, allowances are reductions in sales price for damaged or defective goods sold to customers, and discounts are reductions in sales price given to customers for early payment or for volume purchases. Net sales give a more accurate picture of the actual revenue that the company has earned and can keep.
So, the key difference between gross sales and net sales is that gross sales is a raw revenue figure, while net sales takes into account deductions such as returns, allowances, and discounts, giving a more accurate picture of a company’s effective revenue.
Example of the Difference Between Gross Sales and Net Sales
let’s look at a fictional company, “Gadget Corp,” that manufactures and sells electronic gadgets.
Over a certain period, here’s the company’s sales data:
- Total Gross Sales: $200,000
- Sales Returns: $10,000
- Sales Allowances: $5,000
- Sales Discounts: $15,000
Gross Sales Calculation:
Gross Sales are simply the total amount of sales the company made, without any deductions. So, in this case, Gadget Corp’s Gross Sales are $200,000.
Net Sales Calculation:
Net Sales are calculated by deducting sales returns, sales allowances, and sales discounts from the Gross Sales.
So, Net Sales = Gross Sales – Sales Returns – Sales Allowances – Sales Discounts
= $200,000 – $10,000 – $5,000 – $15,000
= $170,000
So, while Gadget Corp’s Gross Sales were $200,000, after accounting for returns, allowances, and discounts, their Net Sales are $170,000. This gives a more accurate representation of the revenue Gadget Corp will recognize from sales transactions in this period.
