Net sales represent the revenue a company generates after subtracting returns, allowances for bad debts and any sales-based taxes from gross sales.
- Gross sales = Total revenue from sales before any discounts or returns
- Returns = Merchandise returned by customers for refund or exchange
- Allowances for bad debts = Revenue not collected due to uncollectible customer debts
- Sales taxes = Taxes collected from customers and remitted to tax authorities
Net sales more accurately reflects the amount of cash received for goods and services sold. It is a key line item in the income statement and essential for calculating other profitability metrics like net profit margin.
Tracking net sales trends over time provides insight into a business’ true topline growth as it adjusts for factored items like returns that do not generate real revenue. Net sales is also used in calculations like sales per square foot for retail benchmarking.