Which of the following best describes the difference between net sales and gross sales?

• A. Net sales are the total cash received from customers, while gross sales are the total credit sales.
• B. Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales.
• C. Gross sales are always lower than net sales.
• D. Net sales include all sales before any deductions for returns or discounts.

Answer: (B)

Verified step by step guidance

1. Understand the concept of gross sales: Gross sales represent the total revenue generated from all sales transactions before any deductions such as returns, allowances, or discounts.
2. Understand the concept of net sales: Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales. This provides a more accurate representation of the revenue earned.
3. Clarify the difference: Gross sales are the initial total sales figure, while net sales reflect the actual revenue after accounting for deductions like returns, allowances, and discounts.
4. Evaluate the incorrect statements: For example, 'Net sales are the total cash received from customers' is incorrect because net sales are not limited to cash transactions; they include credit sales as well. Similarly, 'Gross sales are always lower than net sales' is incorrect because gross sales are typically higher than net sales due to deductions.
5. Identify the correct statement: The correct description is 'Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales,' as this aligns with the standard accounting definition.