We frequently come across two phrases in relation to financial statements: gross sales and net sales. Before any deductions, a company’s total sales are referred to as gross sales. In contrast, net sales are the total amount of sales made by a business after any returns, discounts, and allowances have been subtracted. This raises the question of why net sales are larger than gross sales.
The fact that gross sales do not take any deductions into account is the key to the solution. As a result, it doesn’t give a true image of how much money a company actually makes. Net sales, on the other hand, account for all deductions, therefore they give a more realistic representation of the company’s revenue.
It is significant to remember that gross profit and net sales are not the same. The money that remains after subtracting the cost of the goods sold is known as gross profit. It is computed by deducting the gross sales from the cost of the sold goods.
You must add back the deductions that were done to arrive at the net sales figure in order to determine gross sales from net sales. For instance, the gross sales would be $1200 if a business had $1000 in net sales and $200 in returns and discounts.
Net sales are therefore neither assets nor liabilities. It is merely a measurement of a company’s income after returns, discounts, and allowances have been taken into account.
In conclusion, because net sales take into account all deductions, they are higher than gross sales because they give a more true picture of the money a company makes. It’s critical to understand the differences between gross sales and gross profit because they’re not interchangeable. The deductions must be put back in order to determine gross sales from net sales. Finally, net sales are a measurement of revenue generated rather than assets or liabilities.