What is Net Sales? Net Sales are those revenues more than the cost of doing business. In accounting, net sales are equated to gross sales less expenses, less service costs, and less inventory, capital equipment, and payroll. Also known as gross profit, they are usually reported on the income statement as gross sales or gross profit. Net profits are usually reported under the gross profit statement because it does not include the cost of good sold or the value of the goodwill acquired. Net sales come from many different areas and are used in all types of businesses to help with planning and allocate resources.
Many businesses make use of the net sales method of calculating their costs of goods sold or the value of their assets. In order to determine these costs, companies may need information such as the inventory levels, average price per item, and average unit price. Many companies also need to know if and how much of a profit in the business is generating. All these statistics are needed in order to determine the costs of goods sold or the value of assets owned.
In addition to costing the companies money, net sales also affect the net worth of a business. Net Worth is a company’s financial capability to pay its debts and meet its obligations. Companies may want to know their net worth since this will help them decide whether to purchase new goods or to re-finance existing assets. This will also help them decide whether they should sell their assets or not.
The gross profit and net sales portion of an income statement represent the total income obtained from direct costs portion and indirect costs portion of a business’s revenue. Direct costs refer to those things that are directly purchased from the customers, while Indirect costs refer to those things that are indirectly purchased by the company from its customers. These include items like the interest earned on loans, property taxes, utility bills, depreciation of plant and equipment, payments made to employees, etc. Indirect costs consist of those things that are indirectly produced by the company through the actions of its employees or other things that are induced by the policies and decisions of the management. These two parts of an income statement are usually separated because they usually do not change greatly from a year to a year.
A company’s gross profit and net sales portion usually include the items that are included in the direct costs portion of the income statement. These include items that are sold to customers directly, such as the items used for production, such as raw materials, machinery, labor and other supplies used in production process, and those that are bought by the customers directly, including fixed assets, temporary fixtures and supplies, and depreciated assets. The company may also include indirect expenses on its income statement. These include those incurred in building and equipping buildings, buying advertising space to promote the business, paying wages and salaries to hired workers, buying equipment for internal staffs, and even those that cover travel expenses for visiting different sites, conferences and seminars.
All of these items are included in the gross sales and net sales portions of the income statement. However, it will be a little difficult for an accountant to give the exact amount of all these items in one income statement because many indirect costs are involved. There are two types of indirect costs that an accountant can include in the income statement. The first type is capital expenses, which include the cost of purchasing equipment and supplies, as well as other fixed assets, that can be related to specific projects. The second type is termed as non-income producing expenses and it represents costs such as real estate taxes, utility bills, personal taxes and other State and local government taxes.
The net sales allowances are included in the income statement along with the gross sales and net profits. What is Net Sales Allowance? Net sales allowance is the excess amount that is deducted from the gross sales and then given to the net sales payable to the customer. It is always deducted by the business against the expenses that have been enumerated above. This allowance is deducted by the company against the net profit that they make.
All businesses make money and then have to pay taxes to the government. They must report the gross profit and net profits they make against the income tax that they pay. So, in order to be able to determine the net sales, all companies must keep accurate records of their net sales and expenses. These records are used by the government agencies like the IRS or SEC to get information on how much a company has made over a given period. If a business makes more than what it paid in net sales, then it is required to pay the excess amount to the government in the form of taxes.