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Net Sales: Definition & Formula

Net Sales: Definition & Formula
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  • 0:00 What Is Net Sales?
  • 0:28 How It's Calculated
  • 0:56 Example
  • 2:06 The Importance of Net Sales
  • 2:40 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield
Net sales is a critical number in a company's financial evaluation that managers need in order to make critical decisions about the future of the business. This lesson will explain the numbers that affect net sales and the net sales calculation.

What is Net Sales?

Sales are critical to the success of every business. It has been said that nothing happens until something is sold. It is crucial, then, that a company understand the difference between gross sales and net sales.

Gross sales is the total amount of the product and/or services sold. While this number is important, net sales is even more important. Net sales is the amount of sales after certain expenses are deducted.

How It's Calculated

When calculating net sales, several numbers need to be identified. The company needs to know the following:

  • Total sales
  • How much was returned
  • The amount of damaged products and missing inventory
  • Any discounts offered on product sales

Once these variables are known, net sales can be calculated based on the equation below.

Net Sales = Gross Sales - (Product Returns + Damaged or Missing Goods + Discounts)

Example

Let's analyze a small company that sells sneakers. The company sold $50,000 in sneakers last year. The company had $2,000 in returns, $1,500 in damaged shoes, $200 in missing inventory, and $500 in discounts. These are items that directly reduce the amount of money that comes into the company from the inventory available for sale. When returns and deductions are taken off the gross sales amount, the numbers reveal the true sales or net sales amount.

Now that we have the variables defined, we can calculate net sales:

Gross Sales = $50,000

Product Returns = $2,000

Damaged Shoes = $1,500

Missing Inventory = $200

Discounts = $500

Net Sales = $50,000 - ($2000 + $1,500 + $200 + $500)

Net Sales = $50,000 - $4,200

Net Sales = $45,800

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