Gross Sales Vs. Net Sales: What’s The Difference?

Business Terms

Business and accounting, like all specialties, have their jargon and technical terms. Many business terms are used regularly, but it isn’t always clear what they mean – or even if they’re being used properly.

This is partially true in a situation like gross sales and net sales. It’s clear that they’re different calculations of sales, but how do they differ exactly? Why is it important that they do it? What are you supposed to do with the two different numbers when you arrive at them?

In this case, the two numbers are both important for accounting and profit calculation – but they measure different things. Gross sales are your unadulterated total; it’s just how much money you receive from sales.

Net sales, on the other hand, considers those deductions. Therefore, your net sales take into account returns, discounts, and allowances. Your net sales, then, are much closer to the actual amount of money you made. It is not, however, your profit. That’s a different calculation.

Key Takeaways:

Gross Sales	Net Sales
Gross sales are unaltered; they just reflect the amount of money you should receive for goods.	Net sales take into account other factors, such as sales, returns, and allowances.
This number can give you an idea of how many items you sold.	This gives you a better idea of how much money you actually made from sales.
Gross, in this case, means “consisting of an overall total exclusive of deductions.”	Net, in this case, means “remaining after the deduction of all charges, outlay, or loss.”
Gross sales aren’t dependent on net sales.	Net sales are dependent on gross sales. The net sales will always be a smaller number than gross sales.
Gross sale is a raw number.	Net sales have to be calculated by subtracting discounts and returns from the gross sales.

What Are Gross Sales?

Gross sales are the total that you made from sales without taking other factors into consideration. According to Merriam-Webster, the gross in gross sales means “consisting of an overall total exclusive of deductions.” This means that your gross sales don’t consider returns, discounts, or inventory loss.

This calculation is raw – it just looks at one aspect of your sales. It’s useful, certainly, in determining a company’s value and worth; however, it doesn’t begin to represent a company’s profits or even how much money it truly made.

Knowing the amount of your gross sales is important in order to see the health of your business. Being able to see the difference between your gross sales, net sales, and profits allows you to determine where you need improvement.

Your gross sales also give you a good idea of how many customers you’re getting in the door, so to speak, and how many of them are purchasing items once they’re there.

What Are Net Sales?

Net sales are the amount of money you make after subtracting other charges from your gross sales. In other words, net sales take into account returns, sales, and allowances. Merriam-Webster defines net as “remaining after the deduction of all charges, outlay, or loss.”

The calculation of net sales gives you a better idea of how much money you’re actually making from your sales. It can also point up issues you may be having, such as a very high return rate, that affects how much money you end up making.

The goal is to have as small a gap as possible between the two. The smaller the number, the more stability it implies. A store with a small gap doesn’t have to have very many sales in order to draw customers and has a low return rate. Investors will see that as a net positive, as will others who examine your accounts.

That isn’t to say that having sales is a poor choice or something to be avoided. Businesses have to find a balance between offering sales and low prices to draw customers and being sure to make a profit. Unless you offer tremendously specified goods or services, it’s always a balancing act.

Gross Sales vs. Net Sales FAQ

Is sales tax calculated on gross sales or net sales?

Sales tax is, as a rule, calculated on gross sales. This is why even when you get a coupon for something free, you often have to pay a bit anyway – you’re still paying tax on the full price.

The gross sales price is the unaltered amount, which means that adding your sales tax would get you to the net sales amount.
How do you calculate net sales?

Net sales are calculated by subtracting the amount lost to sales, allowances, and returns from the gross sales. That means that you need to break down your different discounts and subtract them from gross sales. Most register systems are going to easily be able to track returns and how much money was taken off via sales or coupons.

This also allows you to determine the difference between your net sales and your gross sales. Generally, the smaller that number, the better.
Does gross profit margin use gross sales or net sales?

The gross profit margin is calculated by using net sales. This is because you’re looking at profits rather than just plain sales. Gross profit margin isn’t a flat number like gross sales; it’s a percentage.

The way to calculate the gross profit margin is to take your net sales and subtract the cost of goods sold (COGS) from that. That means you subtract the amount of money you made from the amount of money you spent to acquire the goods you just sold.

Then, you divide the solution to that by the net sales. You should get a decimal. Multiply that by 100 – that gives your percentage.

For instance, say that you made a net profit of $12,000. You spent $7,500 to acquire them, so you’re COGS.

12,000 – 7,500 = 4,500

4,500/12,000 = .375

Your gross profit margin is 37.5%

Business Terms

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Author

Di Doherty

Di has been a writer for more than half her life. Most of her writing so far has been fiction, and she’s gotten short stories published in online magazines Kzine and Silver Blade, as well as a flash fiction piece in the Bookends review. Di graduated from Mary Baldwin College (now University) with a degree in Psychology and Sociology.

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