What is Gross Sales?
Gross Sales are defined as a company’s total revenue generated from all transactions that occurred over a specified period before any deductions, such as returns, discounts, and allowances.
How to Calculate Gross Sales?
Gross sales, or “gross revenue”, are the all-inclusive monetary value generated by a company from the delivery of goods and services to customers in a specified period.
Unlike the net sales metric, a company’s gross sales are calculated prior to the following three adjustments:
- Returns → The reversal of payment, which is typically initiated by the customer (and typically requires the customer to return the product in question).
- Discounts → As an incentive to increase sales volume, a company can offer a discount to reduce the sales price, whereby the lower price is contingent on the customer completing a pre-specified event (e.g. submitting an earlier payment or an on-time payment could trigger a discount) — however, on the date of the actual sale, the company is unaware if the customer will meet the criteria to qualify for the discount.
- Allowances → A sales allowance refers to the reduction in the amount paid by a customer because of minor product defects that the customer points out. However, in such cases, rather than requesting a full refund, the seller and buyer come to an agreement in which a sales allowance (effectively a post-purchase discount) is granted to the buyer (who keeps the defective item).
These three adjustments to gross sales are deemed contra-accounts — so these adjustments would show up as a credit to the sales account as opposed to a debit, since they are designed to offset (and reduce) the sales amount.
Gross Sales vs. Net Sales: What is the Difference?
Conceptually, the total of all three deductions represents the difference between gross sales and net sales, i.e. if a company has no records of any returns, discounts, or allowances, then its gross sales will be equal to its net sales for the period.
Product returns or discounts incentivize customers to make more purchases and are usually a normal part of a company’s day-to-day operations.
The difference between gross sales and net sales is tracked and compared over time because a lower difference between the two metrics implies that a company’s products or services are of higher quality and meet customer expectations more effectively (and vice versa if the difference is growing, i.e. could be indicative of issues with quality control).
By itself, the gross sales metric could be misleading, which is why net sales are viewed as a more useful indicator of a company’s financial performance.
Gross Sales Formula
The formula for calculating gross sales is as follows.
- Gross Sales = Net Sales + Returns + Discounts + Allowances
The formula above can be rearranged to calculate net sales, as shown below.
- Net Sales = Gross Sales – Returns – Discounts – Allowances
Gross Sales Calculation Example
Suppose an eCommerce store had 200k total product orders in the past fiscal year.
Further, we’ll assume that the average sale price (ASP) of the company’s product line is $40.00 per item.
- Units Sold = 200,000
- Average Selling Price (ASP) = $40.00
The store’s gross sales are the product of the ASP and the number of units sold, which amounts to $8 million in gross sales.
- Gross Sales = 200,000 x $40.00 = $8 million
Net Sales Calculation Example
In order to calculate the store’s net sales from our gross sales value, we must now deduct the three items as discussed earlier:
- Returns from Customers
- Discounts Offered
- Sales Allowances
For our hypothetical scenario, we’ll assume that a 10% discount was offered to customers that paid early, which was the case in 5% of all completed customer transactions.
The discount adjustment can be calculated as the product of the two inputs.
- (ASP x 10% Discount)
- (Number of Sales x 5% of Transactions)
The discount value comes out to $40,000.
- Discount = ($40.00 x 10%) x (200,000 x 5%) = $40,000
As for returns, we’ll multiply the number of returned transactions by the average selling price (ASP).
If we assume 4% of all transactions were returned, there were 8k returns, meaning that the downward adjustment to gross sales is $320k.
- Returns = 8,000 × $40.00 = $320,000
Finally, we’ll assume that there were no sales allowances during this period.
In closing, the net sales of our company in the period are $7.64 million.
- Net Sales = $8 million – $40,000 – $320,000 = $7,640,000