Net sales and gross profit
Objective: Calculate net sales and gross profit.
Recommended first: FIFO costing
Net sales = gross sales − returns − discounts. Gross profit = net sales − cost of goods sold. Gross margin is gross profit ÷ net sales.
| Line | Amount |
|---|---|
| Sales | $20,000 |
| Less returns | ($500) |
| Net sales | $19,500 |
| Cost of goods sold | ($11,700) |
| Gross profit | $7,800 |
Gross profit is a quick health check for a merchandiser. A falling gross margin can signal rising costs, more returns, heavier discounts, or shrinkage. Comparing gross margin month to month is more informative than looking at sales alone.
Check your work
- Were returns and discounts subtracted to get net sales?
- Was only COGS subtracted for gross profit?
- Does the margin look reasonable?
Sales discounts and returns are subtracted before gross profit because they reduce what customers actually paid. Operating expenses such as rent and wages come after gross profit, producing operating income.
Sales $20,000, returns $500, discounts $0 close to Income Summary at net $19,500.
| Account | Debit | Credit |
|---|---|---|
| Sales Revenue | $20,000.00 | |
| Sales Returns and Allowances | $500.00 | |
| Income Summary | $19,500.00 |
Common mistakes
✗ Subtracting operating expenses before gross profit.
✓ Gross profit uses only COGS.
Guided practice
Use hints freely here.
Item 1 of 1
Net sales and gross profit
Gross sales are $17,500.00, sales returns are $900.00, and cost of goods sold is $7,000.00. Compute net sales and gross profit.
Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 2
Close revenue with contra accounts
At Dec 31, 2026, Little Fern Online Shop has Sales Revenue $11,600.00 (credit), Sales Returns and Allowances $690.00 (debit), and Sales Discounts $300.00 (debit). Record one closing entry that brings all three to zero through Income Summary.
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Key terms
- Gross profit
- Net sales minus cost of goods sold.
References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.