This requires the purchaser to mail in proof-of-purchase, which is often a barcode, or some type of voucher found inside the packaging. A pre-determined amount of money can then be refunded to the customer. The content within this article is meant to be used as general guidelines and may not apply to your specific situation.

Companies that allow sales returns must provide a refund to their customer. A sales return is usually accounted for either as an increase to a sales returns and allowances contra-account to sales revenue or which expression yields net sales for may as a direct decrease in sales revenue. As such, it debits a sales returns and allowances account (or the sales revenue account directly) and credits an asset account, typically cash or accounts receivable.

Mandatory vs. Voluntary Payroll Deductions

They want to know what direction their company is going so they can properly adjust their strategies. If they are losing sales on a particular product, they know it’s time to either drop the product or reconsider how to sell it. If they see growth, they know their efforts are effective and can replicate that success more easily in the future. Business leaders also need to report net sales data to the company’s stockholders.

Suppose a customer finds your product unfit for them after purchasing. You can give them their money back and take the product if they return it during a specific window of time. As mentioned before, it can provide valuable information to the company, with trends and preferences.

Net Sales vs. Gross Sales: Understanding the Difference

No matter how you slice it, they’re a key metric for your business. Anyone interested in finance, accounting, or general investing should understand what this figure means. Performance, growth, and market share can be revealed through the reporting of it. It is interesting to see how each of the three financial statements uses it differently.

A product may be not useful when it is not correctly marketed to the right audience. For instance, a customer may have had different expectations from the product. Even though it was completely functional, the customer could not use it. In such cases, the full amount is refunded back to the customer.

How to calculate net sales

Net sales are also a crucial part of any company’s income statement. Some companies prefer to include both gross and net sales, while some include the latter only. In all cases, to calculate net sales, you need to have your gross sales first. Net sales depict a company’s income to a truer extent since deductions are already made in the calculation. A business can gauge its financial position by analyzing this figure.

In this case, every customer receives the rebate, whether or not they were even aware it was being offered. Taking the previous example, the net sales of the company is $970,000. Now, if the total amount spent on employee wages and operating taxes is $350,000, then the net income of the company is $620,000.