Updated July 17, 2023
Definition of Gross Sales
Gross sales refer to the revenue generated by an entity from the production of goods or rendering of services during a reporting period without accounting for any sales returns or discount offered.
It represents the total sales achieved by the entity during a particular period before making any adjustments from the sales.
Explanation
Gross sales and net sales are two different terms used in revenue accounting. Gross sales depict the total value derived by an entity from the sale of goods or rendering of services. Entities offer discounts to their customers for encouraging them to make early payments and such a discount is known as a cash discount. The value of the cash discount is not reduced from sales figures when we talk of gross sales.
Similarly, sometimes sales returns occur in businesses as customers return the goods purchased by them due to defects or any other reason. Sales returns are also not reduced from the sales figure in the case of gross sales. Further, if any amount of taxes is charged on goods sold, they shall not form part of gross sales since they do not represent revenue, rather they represent an obligation towards the government.
Thus, gross sales represent the sales achieved by the company without reducing sales returns and discounts. When these two amounts are deducted from gross sales, it reflects net sales.
How to Calculate Gross Sales?
The procedure for calculating gross sales is as follows:
- Identify the value of net sales achieved by the company.
- Add the amount of discount allowed by the company to the figure of net sales.
- Add the amount of sales returns that occurred to the net sales.
- The amount arrived after adding the value of discount allowed and sales returns to the net sales shall represent gross sales.
Example of Gross Sales?
Following are example are given below:
Example #1
A company reporting net sales of $50,000 in its statement of profit and loss. In achieving the net sales of $50,000, the company incurred discount expenses of $10 each on 100 units. Further, 250 units were returned by the customers to the company and the value of returns was $8,450 for all the units. What shall be the value of gross sales in this case?
Solution:
|
Particulars |
Value (In $) |
| Net sales | 50,000 |
| Add: Discount allowed (100 units × $10 each) | 1,000 |
| Add: Sales returns | 8,450 |
| Gross Sales | 59,450 |
Thus, the value of gross sales is $59,450 in this case.
Uses of Gross Sales
The figure of gross sales is useful for the following reasons:
- Gross sales help a business to identify the total revenue earned by it during a particular period of time.
- It is used to calculate useful profitability ratios such as the gross margin ratio.
- Gross sales when compared to net sales for analyzing the quantum of sales returns and identify the causes for it.
- The above comparison also indicates the quantum of discount offered by a business and its discount policy.
Importance of Gross Sales
The gross sales is an important figure for any company especially those companies operating in the consumer retail industry. The management compares the same with the net sales figure to identify the two things:
- Discount Offered: Discount is a good policy for attracting new customers. However, the management needs to ensure that the same is given as per the company’s policies. Any usual discount transaction shall be checked for details.
- Sales Returns: Sales return is not good for any business and an extraordinary increase in the rate of sales returns becomes a serious concern for the management.
Advantages
Some of the advantages are given below:
- Gross sales help to identify the total turnover achieved by any business.
- It is useful in ratio analysis and drawing meaningful conclusions.
- Gross sales, when read with net sales, give important information about the growth of any business.
Disadvantages
Some of the disadvantages are given below:
- The figure of gross sales is not a true reflector of actual turnover achieved by an entity. It doesn’t account for discounts allowed and sales returns.
- Analyzing gross sales alone can give misleading conclusions to the management.
- Usually, businesses report net sales in their financial statements and thus, it is difficult to find the figure of gross sales from the financial statements of any business.
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