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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Net Sales

What it is:

Net sales usually refers to a company's revenue net of discounts and returns. Sometimes, though, the user is referring to net profit, which is sales net of all expenses.

How it works (Example):

Let's assume restaurant chain XYZ sold $1 million worth of sales for the year. However, the chain also offered $30,000 worth of discounts throughout the year to senior citizens, student groups and people who redeemed a certain coupon. It also refunded $5,000 to unhappy customers during the year. As a result, restaurant chain XYZ's net sales are:

$1 million - $30,000 - $5,000 = $965,000

Typically, the company records the discounts and refunds near the top of the income statement, just under the gross revenue number.

Why it Matters:

Net sales are not the same as gross sales. As the example shows, it accounts for certain price reductions, price adjustments and refunds. It's important to always consult GAAP and IASB accounting rules and industry standards to determine what specific types of discounts are appropriate here; some are more appropriately recorded as marketing expenses.

Net sales generally do not account for the cost of goods sold, general and administrative expenses or other costs (those are typically incorporated in the operating income calculation). Net sales are generally intended to be a measure of the "real top line" rather than the bottom line.

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