How Do You Calculate Net Sales?

Calculate sales effectively with the simple tips below.

The net sales of a business are an estimate of the cash flow coming into the business. In accounting, net sales are basically the operating revenues of a business and are designated as such on the income statement of the business. It is important to distinguish between net income and net sales. Net sales takes into account reductions that are directly associated with the sale of the goods, while net income is the net sales of the business that is then further reduced by other business expenses (such as overhead, cost of the materials and employee salaries). Understand how to calculate sales to more fully grasp business accounting and profitability.

Instructions

1. Add up your income from all sources to determine your total gross sales, including cash and credit card receipts.

2. Deduct returns. It is inevitable that a business will experience some amount of returns. Manufacturers and distributors usually have an open return policy for retailers. When finding net sales, you need to keep a running total of all the returns that you receive over the course of the business year. Subtract that dollar amount from your gross sales figure.

3. Deduct allowances for damages and losses. Allowances are similar to returns, with one important difference. In the case where items are damaged in transit or have a quality issue (such as a batch of books that have warped covers), the buyer will usually accept an adjustment in the selling price instead of returning the item for a full refund. So after deducting returns, subtract the dollar amount of any adjustments you've made to your sales price because of a problem with the goods.

4. Deduct any discounts that you gave on the sale. If you were running a special for customers or offered one specific customer a discount as an incentive (in business-to-business transactions it is common to give a discount when the invoice is paid early) then figure out the dollar amount of the discount extended, and subtract it from your previous balance (after returns and allowances). The final amount is your net sales.

Tips & Warnings

• You can keep track of your returns, allowances and discounts given to customer in a Microsoft Excel spreadsheet. For easy tracking, create one worksheet for each individual item (returns, allowances, discounts) and enter in the following columns: Name of Item or Service, Price Sold, Adjusted Price (or amount returned), Percent Discounted (if applicable), Customer Name and Comments (regarding the transaction and why it was returned or discounted).You can then use the totals when you calculate your net sales at the end of the business year.

References

• Financial Statements: A Step-By-Step Guide to Understanding and Creating Financial Reports; Thomas R. Ittelson; 1998