For example, if a company has gross sales of $1,000,000, sales returns of $10,000, sales allowances of $5,000, and discounts of $15,000, then its net sales are calculated as follows:
$1,000,000 Gross sales - $10,000 Sales returns - $5,000 Sales Allowances - $15,000 Discounts
= $970,000 Net sales
The amount of total revenues reported by a company on its income statement is usually the net sales figure, which means that all forms of sales and related deductions are aggregated into a single line item. It is better to report gross sales in a separate line item than just net sales; there can be substantial deductions from gross sales that, if hidden, would prevent readers of the financial statements from seeing key information about the quality of sales transactions.
The best reporting method of all is to report gross sales, followed by all types of discounts from sales, followed by a net sales figure. This level of presentation is useful for seeing if there have been any recent changes in sales deductions which may indicate problems with product quality, overly large marketing discounts, and so forth. If there are large discounts from sales, the reason for them should be disclosed in the accompanying notes to the financial statements.
If a company's income statement only has a single line item for revenues that is labeled "sales," it is usually assumed that the figure refers to net sales.