All the for-profit organisations have the same objective, that is to generate profit. To earn a profit, the company needs to make sales. Thus, we can see that there is a close relationship between sales and profit. If a company wants to earn more profit, it needs to increase its sales. However, income and sales are different from each other, so do net income and net sales. Some business owners who do not know their differences may wonder why and how the accountants from an accounting firm in Johor Bahru differentiate them. Hopefully, the article below would be helpful for those who have these doubts in their mind.
The term net income refers to the company’s actual earnings. In other words, it is the remaining income after the deduction of all the costs incurred, expenses such as cost of production, selling and distribution as well as office and administration, the loss suffered arising from the sale of an asset (Also see Disposal of Fixed Asset in a Company), taxes, interest charged on the long-term debt, as well as preferred stock dividend (Also see Do You Think Dividend in an Expense?). A company may decide whether it wants to hold its net income as its retained earnings or it can distribute the net income to its equity shareholders as the dividend.
Net sales, on the contrary, is the sum of sales that have excluded the discounts offered to the clients, allowances, rebates, missing or damaged goods, as well as sales returns. Sales refer to the revenue that the company has earned through the transactions that involve the goods and services provided to the clients in exchange for consideration. These revenues are known as sales, no matter whether the sales are made by cash or on credit. To calculate net sales, you should minus the expenses mentioned above from the gross sales. In general, net sales will appear in the top line of the company’s profit and loss statement (Also see Balance Sheet Versus Profit and Loss).
From the explanation above, we learned that net income is the amount that the company has actually earned in a specific accounting period (Also see The Relationship Between the Matching Principle and Accounting Period Assumption). On the other hand, net sales are the remaining amount of sales after the returns, allowances, discounts and others have been deducted from the company’s gross sales. The net sales of a company will bring an impact on its net income, but its net sales will not be affected by its net income.
Both net sales and net income are crucial for a business owner to know the financial position of his company. The net income serves as a source for him to know the company’s profitability, while net sales are one of the most basic sources of income for the company. After knowing the amounts of both, the business owner will be able to know different information. By looking at the company’s net income, he gets to know its operational efficiency, whereas the amount of net sales will tell him about the actual sales that the company has made in a certain financial year (Also see The Differences Between Calendar Year and Fiscal Year).