What is the formula of total sale?

Net sales is the total number of sales that a business makes minus the discounts, sales returns, and allowances. Net sales are different from gross sales because the latter does not take sales returns, allowances, and discounts into account. Net sales are part of the income statement and they ensure that an accurate figure is provided when analyzing the financial statement. You will typically see the gross sales mentioned first in the income statement. Then you will see deductions and discounts. After these expenses, you will see net sales. Net sales can be calculated annually or they can also be calculated quarterly depending on the business.

The net sales value must be regularly analyzed by you because it is an important metric. For example, if the difference between gross sales and net sales is big then it means your business is getting product returns or giving more discounts than others. You cannot calculate net sales accurately if you do not know the gross sales, returns, allowances, and discounts. This is why a software solution like TallyPrime is crucial for MSMEs to ensure every sale is recorded so it can be used to calculate net sales and other important values that the business can use.

What is the formula for net sales?

The formula for net sales is as follows.

Net sales = Gross sales – Returns – Allowances – Discounts

Gross sales value refers to the total revenue that your business generates before discounts, returns, and allowances. The gross sales will include sales that have been made with a debit card, cash, credit card, and trade credit. Gross sales is calculated by multiplying the total units sold by the sale per unit price.

Returns or sales returns refers to the goods that have been returned by the customers in exchange for a refund for the goods. Generally, businesses are expected to make a full refund to their customers when customers make a return.

Allowances refers to the price reduction of goods that have been found to be defective or which have been damaged. For example, if a customer bought a product and found that the product isn’t in perfect condition, then the partial refund will be an allowance and will be accounted for in the net sales calculation.

Discounts are given by the business to customers if they meet a certain criterion. For example, if a customer makes the complete payment in one go then he will receive a discount of 5%. This will be the sales discount and this will be used when calculating the net sales.

Note that the sales value does not include the sales tax. This is because the seller is not earning the taxes and so it is not his revenue. Sales taxes are going to the local government and so it is their revenue and not the seller’s. Although the seller is collecting the taxes on behalf of the government, it is eventually the government that is receiving those taxes from sales. Generally, businesses will include it in the sales taxes payable. When the tax is paid to the government, you will see a reduction in the sales taxes payable.

Example to illustrate net sales

You can better understand the formula for net sales with an example.

Let us say that a business had a total revenue of 90,000 in a month. The customers who paid within 15 days were given discounts of a total of $1000. Some products were damaged and so the allowance was $100 in total during the same period. The business also provided a full refund of $500 to the customers who returned products because the products didn’t meet their expectations. Based on this information, let us calculate the gross sales and the net sales.

The net sales will be computed with the formula net sales = gross sales – returns – allowances – discounts. The net sales would be $90,000 - $500 - $100 - $1000 = $88,400.

What is the significance of net sales?

Net sales is important because it is more accurate in comparison to gross sales. It provides an insight into your business and how much you are earning. This gives you a glimpse of your business health as it highlights the costs that are incurred when making sales. This allows you to know if you are meeting your target sales and if you are actually making money rather than spending more on returns and discounts. It helps drive business decisions because you can make better decisions when you have computed net sales. Let us say your net sales value is lesser than expected, it shows that you need to change your marketing or make changes to the prices to make more sales to meet your target.

When business owners, investors, and others look at the gross sales of a business, they get a skewed figure of sales. This can be misleading when making key decisions and this is the reason why net sales are said to be more accurate. Imagine if a business owner gets to know that they are making several thousand in sales while in reality a lot of products are getting returned or losses are taking place due to damage and defective items. In reality, no matter how careful a business owner is, mistakes happen and so the net sales provide a realistic view of the sales.

When you know that products are being returned more than the industry standard or that products are being purchased only after discounts, it is time to rethink your strategies. In the case of discounts, you can provide them only when customers reach a specific threshold of having spent a certain amount so you have more sales. In the case of more returns, you can take a proper look at the most common reason behind returns and then rectify it so that it doesn’t happen as often anymore. You might need to speak to the manufacturing department to ensure the products are nothing short of perfect.

You can only get accurate results when you have reliable financial records. TallyPrime empowers you to stay on top of your finances by recording and organizing your financial reports. It is a business management solution for MSMEs that allows you to generate all financial statements so you know the financial position of your business. It allows you to manage cash flow, inventory, and payroll. It enables you to manage more than one business and store data of different branches for easy accounting from one place. It provides advanced security and banking features so you can do complex accounting with a single software package.

Also Read: 

• Sales Return Entry in Tally.ERP 9
• Sales Management in Tally.ERP 9

Net Sales Formula (Table of Contents)

• Formula
• Examples
• Calculator

What is Net Sales Formula?

The term “net sales” refers to the revenue that a company books after making several deductions such as returns, discounts, and allowances from the gross sales. Gross sales are the total sales before any deductions are done. The formula for net sales can be derived by deducting sales returns, discounts, and allowances from the product of total units sold and sales price per unit. Mathematically, it is represented as,

Net Sales = (Total Units Sold * Sales Price Per Unit) – Sales Returns – Discounts – Allowances

or

Net Sales = Gross Sales – Sales Returns – Discounts – Allowances

Let’s take an example to understand the calculation of Net Sales in a better manner.

Net Sales Formula – Example #1

Let us take the example of a company that sold 100,000 units during the year, each unit worth $5. Calculate the net sales of the company if sales returns are worth $90,000, discounts are $50,000 and sales allowances are $25,000.

Solution:

Net Sales is calculated using the formula given below

Net Sales = (Total Units Sold * Sales Price Per Unit) – Sales Returns – Discounts – Allowances

• Net Sales = ($100,000 * $5) – $90,000 – $50,000 – $25,000
• Net Sales = $335,000

Therefore, the company booked net sales of $335,000 during the year.

Net Sales Formula – Example #2

Let us take the example of a lamp manufacturing company that sold $50,000 lamps last year with each lamp sold at $10 per unit. Now, there were some deductions as mentioned below:

• $1,000 lamps were returned by the customers as they changed their mind after the purchase
• A discount of 2% was offered to customers worth sales of $200,000 due to early payment
• $500 lamps were found to have some defects and such their prices were reduced by $2 per unit

Based on the given information, Calculate the net sales of the company during the year.

Solution:

Gross Sales is calculated using the formula given below

Gross Sales = Number of Units Sold * Sales Price Per Unit

• Gross Sales = 50,000 * $10
• Gross Sales = $500,000

Sales Returns is calculated using the formula given below

Sales Returns = Number of Units Returned * Sales Price Per Unit

• Sales Returns = $1,000 * $10
• Sales Returns = $10,000

Discounts are calculated using the formula given below

Discounts = Discount * Sales Value

• Discounts = 2% * $200,000
• Discounts = $4,000

Allowance is calculated using the formula given below

Allowance = Number of Defective Units * Price Reduction Per Unit

• Allowance = $500 * $2
• Allowance = $1,000

Net Sales is calculated using the formula given below

Net Sales = Gross Sales – Sales Returns – Discounts – Allowances

• Net Sales = $500,000 – $10,000 – $4,000 – $1,000
• Net Sales = $485,000

Therefore, the company booked net sales of $485,000 during the year.

Explanation

The formula for net sales can be derived by using the following steps:

Step 1: Firstly, determine the total number of units sold of the product under consideration during a certain period of time, which can be daily, monthly, quarterly or annually.

Step 2: Next, determine the sales price per unit of the product.

Step 3: Next, calculate the gross sales by multiplying the number of units sold (step 1) and the sales price per unit (step 2) as shown below.

Gross Sales = Total Units Sold * Sales Price Per Unit

Step 4: Next, determine the sales return which includes the value of the products returned by the customers for various reasons like business return policy, product quality, etc. The customers receive a refund for the returned product.

Step 5: Next, determine the value of discounts which includes the deduction offered to the customers on their invoices due to early or timely payments. These discounts intended for lower account receivables and faster recovery.

Step 6: Next, determine the value of allowances which refers to the price reductions offered to the customers in case of some defect or damage in the product.

Step 7: Finally, the formula for net sales can be derived by deducting sales returns (step 4), discounts (step 5) and allowances (step 6) from the gross sales (step 3) as shown below.

Net Sales = Gross Sales – Sales Returns – Discounts – Allowances

or

Net Sales = (Total Units Sold * Sales Price Per Unit) – Sales Returns – Discounts – Allowances

Relevance and Uses of Net Sales Formula

The concept of net sales is a very important one as it is, if not the first line item, one of the first few the income statement that sets the tone of the statement. In fact, in case an income statement has a single line item that is labeled simply as “sales,” then it is safe to assume that the line item refers to the net sales. In most cases, the amount of total revenues booked by a company in its income statement is usually the net sales figure, which is the value arrived at after the deductions of all forms of sales. It is advisable to report gross sales as a separate line item itself, followed by all the deduction and then the net sales. Apparently, non-reporting of the deductions can prevent the readers of the financial statements or other stakeholders from drawing meaningful insights about the sales transactions.

Net Sales Formula Calculator

You can use the following Net Sales Formula Calculator

This is a guide to Net Sales Formula. Here we discuss how to calculate Net Sales along with practical examples. We also provide a Net Sales calculator with a downloadable excel template. You may also look at the following articles to learn more –