Gross Sales vs Net Sales: Your Full Guide

Gross sales and net sales are sales metrics that are fundamentally important for business owners, sales managers, and investors alike. 

They represent essential insights into the business’s performance and, when analysed correctly, can help the company achieve its goals.

In the following sections, we will discuss gross vs. net sales and explain each metric. We also offer easy-to-use calculation formulas, an in-depth comparison between the two terms, and more.

What are Gross Sales

Let’s start from the basics and independently reveal what gross and net sales mean.

Gross sales, also called gross revenue, represent the company’s total sales over a selected period. Gross sales refer to your sales before deducting sales allowances, discounts, and taxes, factoring in all recorded sales transactions and receipts.

Gross sales provide a broader picture of the business’s income, where the gross sales figure helps establish a foundation to assess the influence of expenses on the company.

By understanding gross sales, you can quickly notice certain tendencies regarding how shoppers spend with your business. However, this metric doesn’t include the cost of goods sold so that it won’t provide a complete view of your company’s financial health.

How to Calculate Gross Sales

If you want to calculate gross sales for your company, the good news is that there’s an easy-to-use gross sales formula you can rely on.

You must multiply the number of items sold (gross sales price) by the unit price or price per item. You can also get your gross sales by adding total revenue for a period.

To receive an accurate gross sales result, ensure you’ve adequately collected and recorded sales data for the selected time period. In addition, don’t forget that gross sales don’t feature expenses, deductions, and taxes. Also, you need to ensure that these are kept separate and not used during your calculations.

What are Net Sales

On the other hand, net sales figures or net income are perhaps one of the most crucial factors for any business, regardless of size. However, due to the specifics surrounding its calculation, net sales may not be applicable to all companies.

Net sales reflect the company’s total revenue after subtracting all deductions and expenses and show the business’s spending and earnings during the sales process. The costs linked to net sales will significantly influence a company’s gross profit and gross margin. These include sales returns, allowances, and discounts.

It’s important to note that net sales and profit do not represent the same thing. Profit is the net revenue left after subtracting all costs associated with manufacturing and selling your products or services. 

Being aware of your net sales is fundamental as it can help you determine your gross profit margins because net sales account for allowances, discounts, and sales returns.

Sales returns

If your company allows customers to return products or services after purchase, managing these sales returns can be complex for accurate financial reporting.

You must issue a refund to the customer for each return. In accounting, sales returns are typically recorded in one of two ways: as an increase in the “Sales Returns and Allowances” contra-account to offset sales revenue or as a direct reduction in sales revenue.

It records a debit to the sales returns and allowances account (or directly to the sales revenue account) and a credit to an asset account, such as cash or accounts receivable. This transaction is reflected on the income statement as a decrease in revenue.

Allowances

On the other hand, allowances are rarer than sales returns but still occur in case a business reduces revenue already achieved. For example, enterprises record sales allowances once they’ve made a sale and have received a customer request for a discount or refund. 

The request can be for a partial refund as compensation for poor quality, damaged goods, or other situations.

In this case, a similar process would need to occur as with sales returns, where the sales returns and allowances account are debited, and the asset account is credited.

Keep in mind that net sales allowances are not the same as write-offs, which are expense debits that reduce the value of asset inventory.

Deductions

Lastly, deductions occur when a company offers discounts to customers who pay early.

For example, a customer might receive a 10% discount for paying within the first 5 days of a 30-day invoice. The company only records this discount if the customer pays within the early payment period.

Deductions are managed similarly to allowances and sales returns in accounting.

How to Calculate Net Sales

Calculating net sales and getting your net sales figure is easy, thanks to an existing net sales formula. First, start by ensuring accurate invoicing practices to collect detailed sales data. Once you have the data, you can proceed further with the calculations.

The formula for net sales is the company’s gross sales minus all allowances, sales returns, deductions, and taxes:

Net Sales = Gross Sales − (Allowances + Sales Returns + Deductions + Taxes)

In this formula:

• Gross Sales: The total revenue from sales before any deductions.
• Allowances: Price reductions given after the sale.
• Sales Returns: The value of products returned by customers.
• Deductions: Additional costs that reduce sales revenue (e.g., discounts).
• Taxes: Any applicable sales taxes included in the revenue.

The net sales figure provides a clearer picture of actual revenue generated, offering valuable insight for business performance and financial analysis.

Key Differences Between Gross Sales and Net Sales

Now that we’ve covered the basics of gross and net sales let’s focus on their fundamental differences.

When discussing gross sales vs net sales, it’s vital to understand that these metrics work towards a shared goal. However, they differ fundamentally. Being aware of these differences will help your sales team and management accurately analyse the available data, make comparisons, and find solutions to problems.

Gross sales are essential but fail to provide insights into the company’s cash flow profitability. You can use this metric to calculate metrics that provide a more granular look into the business’s performance. 

Net sales, on the other hand, represent the company’s revenue after taking away all necessary deductions, allowances, and sales returns. This means that they directly reflect profits, making them more reliable.

But how are these two metrics recorded on financial statements? Let’s see more on that below.

Reporting Gross and Net Sales in Financial Statements

As noted above, gross sales show the total revenue accumulated from sales before sales deductions. They’re usually recorded at the top of the company’s income statement and provide a picture of the general sales activity.

Meanwhile, net sales demonstrate the actual revenue after the sales deductions. Together with the direct costs portion, like the cost of goods sold, they’re essential for revealing the business’s profitability. 

It’s helpful to distinguish revenue vs. profit in this context: while gross and net sales represent different stages of revenue, profit only becomes visible after subtracting all expenses, including direct costs and operating expenses.

In most cases, companies will position gross sales at the top of the income statement, list deductions to arrive at net sales, and finally, show net income (profit) at the bottom.

Practical Examples of Gross and Net Sales Calculations

It’s key to examine a few examples to help you gain an even better understanding of net and gross sales.

Imagine running a pet supplies shop and recording £10,000 in total sales for the last 30 days. This number represents your gross sales revenue for the period. 

However, some of the pet supplies you sold were sold at lower prices (with a 50% discount) because they were partially damaged. Let’s say that the discounts account for £1,000. At the same time, a few of your products were returned because shoppers were unaware of this partial damage. Your returns sum up to £500.

Not to mention that one of your shoppers was unhappy that your delivery was too slow. As a goodwill gesture, you offer a 30% refund on the £100 product, equating to £30. You must subtract these deductions from the £10,000 total sales revenue to find your net sales.

Overall, the deductions in this case are as follows:

• £1,000 for discounts;
• £500 for returns;
• £30 for allowances.

Altogether, the company’s deductions for the period are £1,530. Subtracting this number from the £10,000 in gross sales equals £8,470 in net sales.

Gross Sales vs. Net Sales: Industry Standards

When reporting your gross and net sales as part of your accounting practices, it’s essential to be aware of the industry standards in the UK.

Businesses must comply with the UK Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS). The standards you must follow will depend on the type of business you operate, its size, industry, and other factors. 

You should report gross sales at the top of the income statement as total sales or gross revenue. Also, show net sales as the revenue figure after subtracting sales deductions.

Best Practices for Managing Sales Data

To assess your company’s financial health, you must ensure that you can accurately record and manage sales data. 

The following best practices will help you ensure your tracking and analysis are impeccable:

• Accurate recording: Consistently audit and adjust sales records to guarantee that the gross sales and net sales numbers are accurate and reflect the real income after deductions.
• Track and analyse both metrics: Although gross and net sales differ, they’re fundamentally essential and inevitably linked to one another. Plot gross sales and net sales numbers monthly, quarterly, and yearly.
• Sales forecasting: Sales forecasting involves setting future revenue goals based on historical gross sales and net sales numbers. It’s important to assess past data trends to create accurate predictions.
• Use financial reporting tools: Today, plenty of digital solutions can help you streamline financial reporting and calculate metrics like gross sales and net sales. These tools can help you save time, guarantee accuracy, and be confident in your analysis numbers.

By implementing these best practices, you can improve your handling of sales data and the results you can witness from these valuable insights.

Tools and Software for Tracking Sales Metrics

As mentioned above, software tools and instruments for tracking sales metrics can make all the difference.

For example, CRM software solutions like Salesforce can help you receive accurate reports on gross and net sales and other robust data. HubSpot also offers a reliable CRM that you can count on for these numbers. 

In addition, you can use sales performance management tools like Pipedrive and Zoho to access these insights. Not to mention that a wide array of accounting and financial reporting tools also provide these capabilities. Some of the most popular ones include QuickBooks and Xero. 

The right solution choice will ultimately depend on your budget, specific business needs, and other factors.

Conclusion

Gross and net sales are fundamental components of your company’s performance. However, they differ in the type of information they offer and the way they present your financial condition.

We hope our overview of the gross sales vs net sales topic will help you tackle this topic confidently and prepare you with everything necessary to track your sales data accurately.

Frequently Asked Questions

Why is it important to track net sales?

Net sales directly demonstrate your business’s financial health. This metric reflects a company’s revenue after deducting returns and discounts. It helps businesses understand their profitability, manage sales deductions, and monitor overall financial health.

Which is more important for evaluating business performance – gross sales or net sales?

Although gross and net sales are essential, they are typically more important for evaluating performance as they provide a clearer picture of how much revenue the company retains after accounting for deductions. Gross sales can give a misleading sense of the company’s financial health.

How do net sales affect the income statement?

Gross sales are usually reported first on the income statement, followed by any sales deductions. The resulting figure is net sales, used as the starting point for calculating gross profit, operating income, and net income.