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To find net sales, subtract sales returns, sales allowances, and sales discounts from gross sales for the same accounting period:
Net sales = gross sales − sales returns − sales allowances − sales discounts
What to include in the calculation
- Gross sales: Total sales before sales deductions.
- Sales returns: Refunds or credits issued when customers return merchandise.
- Sales allowances: Price reductions or credits when a customer keeps merchandise, such as an adjustment for a product issue.
- Sales discounts: Discounts the business records as reductions from sales.
The IRS says customer credits for returned merchandise and other sales allowances are deducted from gross sales when calculating net sales. The SEC’s investor guide likewise describes net revenues as gross revenues less discounts, returns, and allowances (IRS Publication 334 (2025); SEC, Beginners’ Guide to Financial Statements).
Calculate net sales with a worked example
Suppose a business reports $10,000 in gross sales for a period, with $400 in returns, $100 in allowances, and $200 in discounts:
| Item | Amount |
|---|---|
| Gross sales | $10,000 |
| Less: sales returns | ($400) |
| Less: sales allowances | ($100) |
| Less: sales discounts | ($200) |
| Net sales | $9,300 |
Calculation: $10,000 − $400 − $100 − $200 = $9,300. This example illustrates the arithmetic. Make sure each amount covers the same accounting period, and do not subtract a deduction again if the gross-sales figure you are using already excludes it.
Where net sales appear on an income statement
Net sales is revenue after sales deductions, not profit. To calculate gross profit, subtract cost of goods sold from net sales. The IRS’s example shows net receipts followed by cost of goods sold and then gross profit; the SEC guide describes the same general progression from revenues and deductions to gross profit (IRS Publication 334 (2025); SEC, Beginners’ Guide to Financial Statements).
How to handle sales tax
Do not automatically count sales tax collected for a government as the seller’s sales revenue. In a U.S. small-business recordkeeping example, the IRS calculates monthly net sales by reducing total receipts by sales tax imposed on customers and turned over to the state. Apply the reporting rules for your jurisdiction and accounting context; the IRS example appears in Publication 583 (12/2024), Starting a Business and Keeping Records.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Further accounting practice
For examples of how sales, customer returns, and discounts are recorded, see OpenStax’s Principles of Accounting, Volume 1: Financial Accounting, section 6.7 appendix.
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