What Is the Net Sales Formula?
Last editedSept 20202 min read
Net sales are one of the first things you can expect to see on an income statement, so it’s vital to make sure that you’re providing accurate figures. Fortunately, calculating the figure for net sales is relatively simple, as long as you have access to a couple of key pieces of information. Get the inside track on the formula for net sales with our definitive guide. We’ll explore the net sales revenue formula, provide an example of how to find the net sales formula for your business, and explain some of the uses of the net sales formula. Read on to find out more.
The formula for net sales explained
In a nutshell, net sales are what you’re left with after deducting sales returns, allowances, and discounts from your gross sales. This makes it a fundamental calculation for your business’s financial statements. Mathematically, the net sales revenue formula can be expressed in two ways:
Net Sales = Gross Sales – Sales Returns – Allowances – Discounts
or
Net Sales = (Total Units Sold x Sale Per Unit Price) – Sales Returns – Allowances – Discounts
There are a couple of terms that you may not be familiar with in these formulas for net sales, so let’s explore the constituent elements in greater depth:
Gross sales – the total, unadjusted figure for your business’s sales revenue before sales returns, allowances, or discounts are factored into the equation.
Sales returns – the return of goods in exchange for a refund.
Allowances – price reductions for damaged or defective goods.
Discounts – rewards extended to customer invoice when certain conditions are met, i.e., if you offer net 30 payment terms, you may decide to provide a 5% discount if an invoice is paid in full within 14 days.
As you can see, you won’t be able to work out your net sales revenue formula without a solid grasp of your business’s sales data.
Example of the net sales formula
To see how the net sales formula works in practice, let’s look at an example.
Company A sold 25,000 units over the financial year, with each unit retailing for $20. However, they also had sales returns worth an estimated $40,000, allowances of around $60,000, and discounts of $20,000. Using this information, you can work out the net sales revenue formula like so:
Net Sales = (25,000 x $20) - $40,000 - $60,000 - $20,000 = $380,000
What can you learn from the net sales formula?
The net sales formula can provide your business a much more accurate insight into its actual revenue, giving you a far clearer picture of your overall financial health. After all, if you don’t have a robust understanding of the costs that your business incurs when making sales, it’s difficult to determine whether you’re succeeding. Analyzing your company’s net sales formula can help you make more informed decisions. For example, if your net sales ended up being lower than you budgeted for, you may need to consider lowering your prices to attract more customers.
How to handle the net sales formula in accounting
Typically, you’ll need to record net sales in your company’s general ledger. In most cases, you’ll record the gross sales first, followed by discounts and deductions. Then, you’ll need to post the figure for net sales. After you’ve registered net sales, you’ll need to generate an income statement, adding your net sales to your firm’s other revenue streams.
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