Definition of Net Sales
Under the accrual basis of accounting, net sales is the total amount of goods shipped/delivered to customers during a specified period of time minus any early payment discounts (if offered by the seller) and minus allowances for goods returned by customers, adjustments to the sales invoice amounts, etc.
Does Sales Include Sales Tax?
The amount of a company's sales does not include the sales taxes collected by the seller. The reason is that the sales taxes included in the sales invoices are not revenues earned by the seller. Instead, the sales taxes are the state/local government's revenues. The seller is merely acting as an agent that is required to collect and remit the sales taxes to the government.
As a result, the sales taxes included in a company's sales invoices are recorded in a current liability account such as Sales Taxes Payable. When the company remits the sales taxes to the state or local government, the balance in Sales Taxes Payable is reduced. Any unremitted balance in Sales Taxes Payable is reported in the current liability section of the company's balance sheet.
Sales vs Net Sales
Assume that a company has sales invoices for the month amounting to $63,000. The sales invoices represent the goods shipped to customers and includes $1,000 of sales taxes pertaining to its retail customers. The company offers credit terms of 1/10, net 30 days and some customers paid within 10 days and were granted early payment discounts of $300. The company also granted allowances of $200 to customers who received damaged goods or had been given a price adjustment.
Given the above information, the company's sales are calculated as follows:
Sales invoices with a total of $63,000 minus $1,000 of sales taxes that were included as required by the state/local government = the company's sales of $62,000. Sales are also referred to as gross sales.
The company's net sales are calculated as follows:
Sales (or gross sales) of $62,000 minus early payment discounts of $300 and sales allowances of $200 = the company's net sales of $61,500.