In many cases, the difference between net sales and gross sales can be much more than an accounting detail. Let's take a look atApple and why net sales can be a relevant concept providing a lot of information about the health of the company's different business segments.
Net sales vs. gross salesWhen a company records revenue on a gross sales basis, the full amount of the transaction is recorded in the income statement as sales. On a net sales basis, on the other hand, the company only records as sales a commission for the transaction.
When to choose net sales or gross sales Accounting rules allow some room for flexibility in this area. However, the Financial Accounting Standards Board, or FASB, has issued some guidelines, which can be quite helpful and illustrative.
When a company is the primary obligor in the transaction -- meaning that it's responsible for providing the product or service to the buyer -- then the gross sales method is preferred. If this responsibility lies with the supplier, then the net sales method is a better choice.
If the company can select among different suppliers for a transaction, or if it can set the sales price, that means it's the one calling the shots, so it should record gross sales. On the other hand, if it makes a fixed sales commission for every transaction, regardless of the sales price, then it should go for net sales.
Net sales and gross sales in real lifeApple is an interesting example to analyze. The company recognizes revenue under the net sales method in some segments and under the gross sales method in other segments. Hardware devices are clearly recognized as gross sales, and the same goes of the software and services the company sells directly to customers. On the other hand, third-party apps are registered as net sales.
Apple typically charges a 30% commission on third-party apps, so when you see app revenue for $30 in the company's income statement, this is probably accounted for on a net sales basis. This means that the actual value of the transaction was probably in the neighborhood of $100.
The article How to Calculate Net Sales originally appeared on Fool.com.