Net Worth

Net sales represent the revenue a business actually earns from its primary activities after subtracting any product returns, price adjustments, or discounts granted to customers. This figure provides a more realistic view of how the company is performing in terms of sales.

Formula:

Net Sales = Gross Sales – (Returns + Allowances + Discounts)

1. Gross Sales: The total billed amount before any deductions.
2. Returns: Value of goods sent back by customers.
3. Allowances: Reductions offered when products have minor issues or service shortcomings.
4. Discounts: Amounts reduced for early payments or promotional pricing.

Net sales are useful for evaluating revenue quality, analysing profitability trends, setting pricing strategies, and preparing financial statements such as the income statement.

Illustration:

Suppose a company records ₹10,00,000 in gross sales. If returns amount to ₹50,000, allowances to ₹20,000, and discounts to ₹30,000, then its net sales equal ₹9,00,000.