What are net sales?

The first item in the income statement is operating revenue, which is the net amount of sales revenue after all reductions to gross sales, such as sales returns, allowances and discounts.  Gross sales is the revenue of a company calculated by subtracting from revenue any trade discounts, corrections and taxes based on sales, it being the invoiced amount and the value on which credit terms of sale are based.  A trade discount is a reduction in the regular or list price of goods allowed to a class of customer (e.g., wholesalers), to any one customer for the purchase of a large quantity, or to all customers as a general price decrease on the goods.

Contra-revenue accounts are contra accounts that reduce gross sales to arrive at operating revenue, including sales returns, allowances and discounts.  A sales return is an item that was purchased but later returned; a sales allowance is a deduction granted for damage, delay, imperfection or other reason in respect of invoiced goods or services; a sales discount is a reduction in the invoiced amount if the customer settles the debt within the specified period according to the credit terms of the sales transaction.  If freight charges for the transportation of the goods sold to the customers are included in the sales price, the amounts paid must also be deducted to determine net sales.  Unless otherwise qualified, “sales” on an income statement refers to net sales, which is a company’s gross sales reduced by all trade discounts, sales returns, sales allowances, and sales discounts granted by the company.