How to calculate net sales?
Gross and net sales are both important figures for companies. The difference between net sales and gross sales comes down to returns, and discounts offered on merchandise. It is important for a manager to look at the trends when it comes to returns and allowances. If returns are too high, then the quality of a product may be unacceptable.
Gross sales are the amount of the sales before anything else is accounted for. The reports on sales include cash sales, debit sales, accounts receivable, and credit sales. If a store sells 100 shirts at $10 apiece, then the accounting records will show $1,000 (100 X $10).
Allowances and returns
Return sales are important because they allow a company to determine how much is really being sold. People are prone to return defective goods. Allowances are when the selling price is reduced on defective products so that customers will not return them. In the example above, if a customer returned a shirt because it had a hole in it, the business would debit the return sales and allowances by $10 for each shirt.
This term refers to discounts of sales for people who pay the bill early. This sales account maintains a record of discounts for customers who use an agreement to save money by paying early.
Gross sales minus contra sales, allowances and returns, and discounts give you net sales. In the previous example which has no cash discounts, net sales are $1,000 minus $10 (return) which equals $990.
Debits make asset accounts higher and include accounts receivable and cash. They also make expense accounts higher and reduce sales and liability. Credits decrease expense accounts and make sales higher as well as liability. Debits make a contra sale higher, which includes cash discounts and sales returns, but they are decreased by credits.
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