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Within the wide range of elements that statistical science puts at our disposal, in this article we will see one that is vital to run, effectively, a reliable and accurate accounting analysis to calculate the finances of your business . We are referring to the deduction of net sales, a vital formula for measuring the economic success of any business.

That said, in what follows, we will analyze how a company's net sales are obtained and we will study the difference between net sales and gross sales.

Definition of net sales

In general terms, net sales are defined as the result obtained after carrying out an operation that contrasts the total or gross sales of a commercial entity with the cost of returns, indemnities (or compensations) and discounts.

In other words, by determining the net sales of a business, we obtain an unequivocal record that shows in figures whether a company enjoys a healthy economy or whether, on the contrary, it has followed ineffective business strategies .

Importance of net sales

The importance of net sales, a formula capable of unequivocally showing the financial health of a business, lies essentially in the effective valuation of the resulting capital after using the formula correctly.

The realization of this valuation is positive even for customers. If your brand name is successful, the chances of implementing a good branding strategy minimizes the chances of losses, thus extending the gap between the amount of gross income and net income.

Net sales: net sales considerations

As is clear from its definition, net sales implies all dividends that are deducted from the gross total with the use of a formula that suppresses any records that inflate the revenue figures. To avoid this error, it is necessary to handle four very important notions that are decisive when calculating net sales:

• The total gross sales.

• The amount in returns.

• The numbers in compensations.

• The impact of discounts.

Example of net sales

If you are wondering how to net sales, we have prepared for you a simple example to find out:

Suppose a business sells its total merchandise and collects $10,000,000. Now let's imagine that returns amount to 15% of that amount and that, in addition, rebates amount to $500,000. Given these numbers, then the following occurs:

Net Sales = Gross Sales - (Returns + Rebates)

=

$8.000.000 = $10.000.000 - ($1.500.000 + $500.000)

According to our example, net sales amount to $8,000,000. As we can see, from gross sales we subtract the computation that includes the total of returns (whose reasons are multiple, the most common being that the product, good or artifact purchased by the customer is faulty) and what is granted in rebates (which are often made depending on certain times of the year or in case the merchant needs to increase its sales).

Net sales on the income statement

As we have seen, a financially healthy company is a company that can project itself in the market. Net sales, a formula that is also useful for us to start what we call the income statement, becomes more interesting if we break down the latter, as we can see in the following example.

Example of income statement

As we can see, net sales on the income statement is the beginning of the technical document type which records both the total revenues and total expenses of a business in a specific time period. of a business in a specific period of time.

Differences between net sales and gross sales

For sure, everything that entails the net sales and gross sales indexes refer to the total amount of money brought in during a given period of time compared to the resulting figure after applying the formula that deduces its own difference. As we can see, net sales in the income statement is the beginning of the type of technical document that records both the total income and total expenses of a business in a specific period of time.

As for gross sales, we can highlight the following factors:

• Their total figure is not indicative of good production in the business.

• They represent the total of all sales during a period of time without deductions.

• Itdoes not include operating, maintenance or tax expenses.

• Itis not recorded in the final financial statements of the business.

Now, in relation to net sales, these points should be emphasized:

• This result is a good indicator of all the strategic operations of a trade.

• This figure is the total minus allowances, discounts and returns.

• It is the number to take into account when making economic decisions.

• It is the record that appears in the final financial statements of the business.

Before concluding, it is very important not to mix the concept of net sales with that of net income. Briefly, net income is the calculation that analyzes the difference between net sales and production costs, personnel, administrative and incidental expenses.

In fact, net sales, as the result of a commercial formula, is clearly the starting point for evaluating whether the management reflected in the profits of the business year has corresponded to the goals set from the beginning.

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