The primary objective of every company is to create sales, as it is the primary source of earnings, i.e. income to the company. Therefore, the sales of the company are directly related to its income, i.e. the higher the sales, the higher is its income and vice versa. Here, we are talking about the net sales and net income. Net sales can be explained as the amount of sales arrived at, after subtracting returns, damaged or missing goods and discount allowed.
Net income, on the other hand, is the actual earnings of the company. It can be reckoned by taking revenue and deducting the cost of production, operating expenses, interest, taxes and preferred stock dividend. Check out the article provided to you, in which we have compiled the important differences between net sales and net income.
Content: Net Sales Vs Net Income
|Basis for Comparison||Net Sales||Net Income|
|Meaning||Net Sales is the company's sales net of discounts, allowances and returns.||Net Income is the actual income of the company earned during a particular accounting period.|
|Interdependency||Net Sales is not dependent on Net Income.||Net Income is dependent on Net Sales.|
|Importance||It is the basic source of revenue of the entity.||It is a source of knowing the profitability of the entity.|
|Objective||To know the actual sales in a financial year.||To know the operational efficiency of the company.|
Definition of Net Sales
For understanding Net Sales, firstly we will discuss sale – A sale is a transaction in which goods are sold, or services are rendered to the customer for consideration, in which the ownership of the stuff is transferred to the customer. The revenue generated from the sale is known as sales, i.e. gross sales irrespective of cash and credit.
Nowadays, due to cut throat competition, the vendors gives many facilities to customers, to raise their sales volume or to make good relations with the customer. The gross sales are inclusive of all discounts (both trade and cash), rebates, allowances (for damaged or lost goods) and sales returns (Return Inward). When the amount of all these are deducted from the gross sales, then it is known as Net Sales, which is the actual sales of the company.
Generally, the figure of Net Sales is shown in the top line of Income statement.
Definition of Net Income
The remaining income left with the company after deducting all costs, expenses (production, office & administration, and selling & distribution), loss on sale of asset, interest (long term debt), taxes and preference dividend from Net Sales is known as Net Income. Many times the Net Income is substituted as the bottom line as it is shown at the bottom of the income statement.
The company can either hold Net Income in the form of retained earnings or distributed among the equity shareholders as the dividend. The calculation of earnings per share can also be done by dividing the total number of shares from the net income. It is the net increase in the equity shareholder’s fund.
Key Differences Between Net Sales and Net Income
- Net Sales is the amount indicating the actual sales made by the company during a period while Net income is the amount showing the actual income earned from net sales and other operations of the company.
- Net Sales is the major source of earning revenue, whereas Net Income helps in understanding the financial health of the company.
- Net Income is dependent on Net Sales.
- Net Sales are shown in the first line of Income Statement. On the contrary, Net Income is shown in the last line of the income statement.
- Reported in Financial Statement.
- Both are necessary for the survival of the entity.
- Used by the readers of the financial statement.
- They are calculated for a particular duration.
The two primary tools used for analyzing the company’s financial position is the Net Sales and Net Income. The calculation of the two is obligatory as they represent the revenue generated from normal business operations as well as the net earnings of the entity, in a given period. A lot of times these crucial figures are also used for making comparisons between two or more firms. Along with that forecasting or budgeting of future sales and income can also be done.
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