Net sales and the income statement 

Also referred to as Net Revenue, Net Sales is found in the Revenue portion of the Income Statement. Net Sales lives in the top section of the Income Statement—a metric that takes some adjustments into account, but not all. Most notably, expenses are not taken out in the Net Sales calculation.

 

Net Sales vs. Gross Sales

A top-line metric, Gross Sales represents the total sales made in a given period. Or, as Accounting Tools puts it, “Gross sales is the grand total of all sale transactions reported in a period, without any deductions included within the figure.”

Those adjustments make up the primary difference between Gross Sales and Net Sales.

 

Net Sales vs. Net Income

Net Income is a more drilled-down calculation of how much a company earns. Also called Net Earnings, the formula for Net Income involves starting with Net Sales and subtracting expenses including:

• Cost of Goods Sold (COGS)

• Selling expenses

• Operating expenses

• General, administrative, and other expenses

• Depreciation

• Interest

• Taxes

Those adjustments make up the difference between Net Sales and Net Income.

     

Net Sales Vs. Operating Margin 

Both these numbers appear in your income statement. Net sales and operating income are different terms. Net sales refers to the income you make from selling goods or services for a specific period of time. Operating income is the amount left after you reduce expenses from net sales.

How to Calculate Net Sales

As we mentioned above, Net Sales is what remains after all returns, allowances, and sales discounts have been subtracted from gross sales. Now, let’s talk about how to use those pieces of financial information to calculate Net Sales.

Net Sales Formula

Here’s the sales formula for calculating Net Sales:

Net Sales = Gross Sales – (Returns + Allowances + Discounts)

So, for example, if a company has the following finances:

• Gross Sales: $100,000

• Returns: $5,000

• Allowances: $3,000

• Discounts: $2,000

Their Net Sales equation looks like this:

 

Here’s another example: A mid-sized software company wants to calculate their Net Sales for the prior quarter to see how a discount they ran affected their sales. Their numbers are as follows:

What is Cost of Sales 

 

Cost of Sales refers to the various costs and expenses a business incurs during the production and sale of their product or service. Those costs can include labor, materials, and overhead. For an ecommerce company, for example:

• Labor: Salary and benefits paid to warehouse staff

• Materials: Purchasing or manufacturing inventory

• Overhead: Other expenses like shipping, ecommerce platform fees, payment processor fees, etc.

   

As Avinash Chandra, founder and CEO at BrandLoom explains it, “The cost of sales is basically the total cost that is utilized to craft a product or service. It is one of the best sales metrics to analyse your profit and loss. It helps you strategize your business activities in a cost-effective way.”

The bottom line is Cost of Sales calculations primarily measure efficiency. What does it cost you to produce the sales and revenue you produce?

Cost of Sales vs. Cost of Goods Sold (COGS)

Cost of Sales is often confused with Cost of Goods Sold (or COGS)—and for good reason. The two metrics measure the same thing, but they’re used by different types of companies.

Retailers, for example, typically used sales formula like Cost of Sales, while manufacturers are more apt to use Cost of Goods Sold. Service-based businesses like accountants and lawyers are also likely to use Cost of Sales. Businesses that offer both physical products and services may even include both metrics in their financial statements.