In a business, mostly a person sells and deals with a product or service, and for his business, the single most important factor that will ensure its growth is the increasing profits or gain. Profits can only be increased if the sale of the business is more than the total expenses bear for the production of the product or service. To determine whether its profit or sale, it is important to calculate the total sales of the business. Sales are divided into two categories net sales and gross sales.
Gross vs Net Sales
The main difference between Gross and Net Sales is in the way they are calculated and then where they are included. Gross sales are not calculated on the basis of net sales. They are independent, while for net sales, gross sales have to be also included, net sales are included in the profit and loss account while gross sales are not. Gross sales are not considered to be an accurate method of determining the financial position and making future decisions, whereas net sales are more accurate for the same purpose. Except these, they also differ in terms of relevance, the amount, expenses deducted, etc.
Gross sales are the amount an organization earns by selling the units or service by deducting a few expenses or items that include sale returns and sales allowances etc. or in other words. It is the revenue earned before making any adjustments in the sales. It is useful but cannot be a very good option to depend on, as it may lead to misinterpretation of data sometimes.
Net sales are operational revenue earned by an organization by selling the goods or services in a period. It is calculated with the help of gross sales that are also revenue but have a different formula. It is important to calculate as financial and other related decisions related to the future of the organization are based or affected by this.
Comparison Table Between Gross and Net Sales
| Parameters of Comparison | Gross Sale | Net Sale |
| Interdependency | Not dependent | Dependent |
| Amount | High | Less |
| Deduction of expenses | Less operational expenses | Less non-operational expenses |
| Relevance | Less or no relevance | Important for several proposes |
| Order of calculation | Calculate before | Calculated after |
What is Gross Sale?
Following are the results steps for calculating gross sales:
- First, you have to determine the number of total items sold.
- After this price per unit has to be determined.
- After determining both figures, they have to be multiplied then.
- The figure you get as a result is the gross sale.
For example, if the total sales in a period are 400000 and the price per unit is 38.5. Then we have to multiply 400000 with 38.5, and the result 15400000 is the gross sale of that year.
Except for this method, there are other ways of calculating gross sales too. For example, it can also be calculated with the help of net sales.
Uses of Gross Sale:
- It is helpful in determining the total revenue earned in a particular period.
- It is used in measuring or calculation of accounting ratio.
- It determines the discount allowed and received.
Advantages of calculating Gross Sales:
- It measures the total turnover that the business has achieved in a period.
- It is useful in drawing meaningful results, such as ratios, etc.
- Along with the net sale, it provides the basis for decision-making in the future.
Disadvantages of calculating Gross Sales:
- It sometimes does not provide the exact figure of turnover achieved by the organization.
- It can lead to misconclusions and misinterpretation of accounting ratios and others.
Some might say that gross calculation sales have relevance, but it is not true in all cases.
What is Net Sale?
Net sales are the end amount generated by an organization by adjusting certain accounts like Sales return, discounts and allowances, and the income generated by the sale. Net sales could be referred as the ending amount the company or organization receive by eliminating all the cost that is used. It gives an overview of how much loss or benefits are being earned at a particular time. It is used by the organization and owners to compare the accounts to evaluate the net profit that is being earned by the company.
Net Sales formula = Gross Sales – sales return- sales discount- allowances on sale
Net sales help to review how good an organization is doing in terms of finances. Investors always look for net sales before investing in a company. Net sales portray a picture of the gross sales too. It is directly reliant on gross sales. An organization’s commitment is totally based on how net sales are.
Main Differences Between Gross and Net Sales
- Both of them have a different formula to calculate the sales. In gross sales, net sales may or may not have a role, but when calculating net sales, gross sales have to take into consideration. This means that net sales are independent of the gross sales while the gross sale is not dependent but independent.
- While making the decisions of the future of the organization, the gross sale does not have any direct role in the process, while net sales are directly and play the main role in the decision-making process.
- Both of the sales also differ when it comes to profit and loss accounts. Gross sales are not mentioned in the profit and loss account. Therefore, they have no effect there, but net sales are mentioned in the profit and loss account.
- While calculating the gross sales, sales allowance returns and discounts are not included, whereas it is included while calculating the net sales of the organization.
- Gross sales can never be lower when compared to the net sales, and similarly, net sales can be equal but never be higher than the gross sales of the business.
- In terms of order of calculation, the gross sale is calculated before and early than the net sales that are calculated after the calculation of gross sale.
- Both of them deduct different types of expenses, gross sales do not include, or while calculating it, the operational expenses are deducted, whereas while calculating the net sales, non-operational expenses are deducted.
Conclusion
Therefore, both gross and net sales have been cleared now. Calculations of both of them are important for drafting the financial statement of the company or business. Both of them are also important as both of them provide a complete analysis of the business. Both of them are calculated over a fixed period and helps internal and external comparison. They are also helpful in determining whether the resources are being used efficiently and effectively. On the basis of the results after calculation, the objectives and goals of the business can be decided for the future by shareholders and investors. Lastly, both of them are a crucial part of the company and need utmost attention.
References
- https://www.tandfonline.com/doi/abs/10.1080/10835547.1990.12090603
- https://www.jstage.jst.go.jp/article/seisan/5/1/5_KJ00010011663/_article/-char/ja/
- https://www.sciencedirect.com/science/article/pii/S0038092X12002125