Glossary

Gross Sales vs. Net Sales

Definition

Gross sales and net sales are key financial metrics that measure a company's revenue:

  • Gross Sales: The total revenue generated from sales before any deductions such as returns, discounts, or allowances.
  • Net Sales: The actual revenue a company retains after subtracting returns, discounts, and allowances from gross sales.

Formula:

Net Sales=Gross Sales−Returns−Discounts−AllowancesNet Sales=Gross Sales−Returns−Discounts−Allowances

Net sales provide a more accurate representation of revenue available for covering business expenses.

Why is net sales more important than gross sales?

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Net sales reflect the actual revenue a company earns after accounting for reductions, providing a more realistic financial picture.

How do discounts and returns affect net sales?

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Customer returns, price discounts, and allowances lower net sales, impacting profitability and financial reporting.

Can gross sales be higher while net sales decline?

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Yes, if returns and discounts increase, net sales may decrease even if gross sales remain high. This can indicate pricing issues or customer dissatisfaction.

Where are gross and net sales reported in financial statements?

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Both are reported on the income statement, with net sales being the final revenue figure used for calculating profit margins.

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