Sales (Accounting)

In accounting, sales is the account, and the line on the income statement, that records revenue a business earns from selling the goods or services that are its main line of business. A clothing retailer's sales are the prices charged for clothes; a software company's sales are its subscription and license fees. Sales are recorded when control of the goods or services passes to the customer, under the revenue recognition rules, whether the customer pays cash at once or on credit.

Sales is a revenue account with a normal credit balance. It is a temporary account, closed to retained earnings at the end of each year. Revenue from incidental activities, such as interest earned or a gain on selling old equipment, is not included in sales; it is reported separately as other income. Many companies now label the line revenue or net revenue rather than sales, but the meaning is the same.

A cash sale is recorded with a debit to cash and a credit to sales. A credit sale, supported by an invoice, debits accounts receivable and credits sales. Businesses using a perpetual inventory system make a second entry at the same time, debiting cost of goods sold and crediting inventory for the cost of the goods sold. Under a periodic system, cost of goods sold is worked out only at the period end.

Sales tax collected from customers is not part of sales. It is recorded as a liability, sales tax payable, because the business collects it on behalf of the state or local government and must pay it over.

The total of all sales recorded is gross sales. Three contra-revenue accounts with debit balances reduce it:

• Sales returns record goods sent back by customers for a refund or credit.
• Sales allowances record price reductions given to customers who keep damaged or incorrect goods.
• Sales discounts record reductions for prompt payment, such as an early payment discount under terms of 2/10, net 30.

The result is net sales:

Here each term is the total for the period from the related ledger account. Trade discounts, which are reductions from list price agreed before the sale, are not recorded at all; the sale is simply recorded at the discounted price.

A wholesaler records gross sales of $2,400,000 for the year. Customers return goods invoiced at $65,000, receive allowances of $15,000 for minor defects, and take $20,000 of discounts for early payment. Net sales are $2,400,000 minus $80,000 minus $20,000, or $2,300,000. If cost of goods sold is $1,610,000, gross profit is $690,000, a gross margin of 30 percent of net sales.

On a multiple-step income statement, sales appears at the top, sometimes with gross sales and the deductions shown, more often as a single net figure. Sales is the starting point for most profitability ratios and for growth analysis. Analysts examine sales growth by product, region and channel, compare it with the growth in receivables to check that customers are paying, and watch for signs of aggressive recognition, such as large sales recorded just before the period end that are reversed as returns afterward. Companies disclose a breakdown of revenue by type and timing in their notes under ASC 606 and IFRS 15. In everyday business usage, the word sales also refers to the team or function that wins customers, whose costs are classified as selling expenses rather than deducted from sales.