Definition of Net Sales
When a company makes a sale, the general ledger account Sales is credited and the Sales account will have a credit balance.
If a company grants an early payment discount, the amount of the discount is debited to the contra revenue account Sales Discounts. Similarly, if a company gives a customer a sales allowance or accepts a return of goods, the account Sales Returns and Allowances will be debited.
Example of Net Sales
Assume that in the most recent month, a retailer had $220,000 of merchandise sales. It also allowed customers $2,000 in early payment discounts. Some customers were allowed to return goods that had been sold for $4,000 and a few customers were given sales allowances for $1,000.
The retailer's net sales for the month were $213,000 ($220,000 - $2,000 - $4,000 - $1,000).