Sales is an essential component of a company’s financial statements. It is reported on the credit side of the income statement. Any value of goods sold by the company is reported as gross sales in the company.

In simple words, gross sales is calculated by multiplying the quantity with the unit price of an item, that is, before any adjustment is made on account of any sales returns made by the customer, discounts offered to the customer or any other allowance provided to the customer.

A company’s main focus is generally on the net sales as it indicates the actual amount of money that the company has earned. Net sales is calculated by deducting value of sales return, discounts and allowances. Still it is important to understand the concept of gross sales in order to ensure proper accounting and recording of sales transactions.

A company is required to make sales in order to finance its business operations. It is important to note that gross sales may not indicate the actual amount of money that may be available to meet day to day business requirements.

Further, many stakeholders are not interested in the figure of gross sales. For Instance, investors are mainly interested in net income which is calculated by deducting all business expenses from net sales.

Let Us Understand The Calculation Of Gross Sales With Examples

Example 1

A company is engaged in production of shoes. This company sold 1000 pieces of shoes in the year 2009-2010 at a unit price of $ 10. This company’s gross sales will amount to $ 10,000.

Example 2

A company is engaged in providing consultancy services in the field of finance and accounting.This company has five consultants and charges $ 25 per hour per consultant from its clients. Consultants worked for a total of 10,000 hours in the year 2010-2011. In this case company’s gross sales/consulting fees will be equal to $ 2, 50,000 (10,000 hours * $ 25 per hour).

Example 3

A company’s net sales for the year 2010-2011 is $ 3, 00,000. Company has given a total discount of $ 5,000 to its customers during the year. Goods worth $ 25,000 were returned by the customers during the year. In this case company’s gross sales will have to be calculated by taking net sales as the basis.

Since we are already available with the figures of discount allowed and sales returns, we can simply add these two figures with the net sales figure. In this case, company’s gross sales will be $ 3, 30,000 ($ 3, 00, 000 (net sales) + $ 5,000 (discount allowed) + $ 25,000 (sales returns)).

Gross Sales can also be calculated by adding the figures of cash sales and credit sales before making any adjustments. For Instance, a company has a made cash sales of $ 10,000 and credit sales of $ 75,000 during the year 2010-2011. However, goods worth $ 15,000 were returned by a customer to whom goods were sold on credit basis.

In this case, a company’s gross sales will be $ 85,000 (10,000 (cash sales) + 75,000 (credit sales)) while its net sales will be $ 70,000 (85,000 (gross sales) – 15,000 (sales returns)). It is important to note that gross amount (quantity * unit price) in respect of a particular order is generally mentioned on the invoice issued by the company.

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