GROSS SALES: WHAT THEY ARE, HOW TO CALCULATE THEM AND EXAMPLES - DUDAS - 2025

The gross sales is the amount which measures the total sales of a company over a period of time. This amount has not been adjusted to include the costs incurred in generating those sales, as well as discounts or customer returns.

Includes all cash, credit card, debit card and business credit sales before deducting sales discounts, merchandise return amounts, and concessions.

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Gross sales are simply a total figure. It is the number of products that were moved from the shelves and sold to customers.

Primarily important to companies operating in the consumer retail industry, gross sales reflect the amount of a product that a company sells relative to its major competitors.

Although the applicability of gross sales to a company's success is somewhat debatable, it is a popular indicator used in retail businesses to compare overall organizational size and annual growth.

What does it consist on?

Gross sales are the amounts that a company earned and recorded from the sales of its products. The amounts originate from the company's sales invoices.

The gross sales amounts from the sales invoices are posted as "Sales" in a general ledger account. All returns, sales discounts, and concessions must be recorded separately as accounts against income. In this way management can see the magnitude of these elements.

While gross sales can be an important tool, specifically for stores that sell retail items, it is not the last word in a company's revenue.

Ultimately, it is a reflection of the total amount of income a business generates over a certain period of time.

Gross sales are generally not included in an income statement, or are included as total revenue. On the other hand, net sales reflect a truer picture of a company's top line.

Gross sales can be used to show the consumption habits of consumers.

Gross sales vs. net sales

Analysts find it helpful to plot the gross sales and net sales lines together on a graph. This way they can determine what the trend of each security is over a period of time.

If both lines do not grow together, increasing the difference between them, this could indicate problems with the quality of the product. This is because costs are also increasing, but it can also be an indication of a higher volume of discounts.

These figures should be observed over a moderate period of time to make an accurate determination of their importance.

Net sales reflect all price reductions paid by customers, product discounts, and any refunds paid to customers after the time of sale.

These three deductions have a natural debit balance, where the gross sales account has a natural credit balance. Thus, deductions are built to offset the sales account.

Registration methods

The two common methods for recording gross sales are cash accounting and accrual accounting.

Cash accounting is an accounting method in which payment receipts for sales made are recorded in the period when they are received. That is, if the cash method of accounting is used, gross sales only include sales for which payment was received.

Accrual accounting is an accounting method in which sales are posted when they are generated, rather than when the payment is received. That is, if the accrual accounting method is used, gross sales include all sales, cash and credit.

How to calculate them?

Gross sales are calculated simply by adding the value of all invoices for products and services that have been sold, regardless of whether the accounts have been paid.

In accounting terminology, "gross" means before any deductions. Therefore, when calculating gross sales, all you are doing is looking at overall company sales that have not been adjusted to include discounts or customer returns.

All of these charges will be included in the net sales figure. Gross sales also do not take into account certain price reductions or price adjustments.

This indicator is important for retail businesses that need to file a sales tax return.

Examples

Suppose that restaurant chain XYZ made $ 1 million in sales for the year. The company would record this as gross sales.

Gross sales are not the same as net sales. If the chain also offered $ 30,000 in discounts throughout the year to seniors, student groups, and individuals who redeemed a particular coupon, and also reimbursed $ 5,000 to dissatisfied customers during the year, the net sales of the XYZ restaurant chain are:

$ 1,000,000 - $ 30,000 - $ 5,000 = $ 965,000

Typically, the company's income statement would show $ 1 million of gross sales, then $ 35,000 of coupons and discounts, and then $ 965,000 of net sales.

Sales comparison

Let's take a simple example of two different companies operating within the retail electronics industry. They sell similar products, but one company sells a cheap variety of electronic products, while the other sells more expensive products.

When you review the financial statements, you will see the following data for the gross and net sales of each of the two companies:

As can be seen, the cheap company appears to be a slightly larger company, taking gross sales as a perspective, selling products for $ 2,000,000 more than the expensive company.

Although this is a positive factor, it seems that the cheap company also receives a lot of product returns. Most likely this is driven by the lack of quality associated with cheaper products.

In comparison, the expensive company, the smallest company based on total sales, can limit the number of product returns with a higher-quality, more expensive product line.

This generates a stronger net sales figure and tends to produce a stronger profit margin. This benefit can be used by the expensive company to finance its operations.

References

1. Karen Rogers (2018). How to Determine Net Sales on an Income Statement. Small Business - Chron. Taken from: smallbusiness.chron.com.
2. Investopedia (2018). Gross Sales. Taken from: investopedia.com.
3. Harold Averkamp (2018). What are gross sales? Accounting Coach. Taken from: accountingcoach.com.
4. Investing Answers (2018). Gross Sales. Taken from: investinganswers.com.
5. My Accounting Course (2018). What is Gross Sales? Taken from: myaccountingcourse.com.