A business firm pays money for raw materials and other necessary supplies, manufactures different products and sells. They deduct all expenses from the income received from such sales.The remainder becomes their profit. Here some important terminologies have been given. E.g. Gross sales, net sales, cost of good sold, gross margin or profit, operating expenses, mark-up etc.
1. Gross Sales
The total sales or total amount received by a business firm from sales of goods is called gross sales. A gross sales becomes an important point of financial statement of a business firm. In this sales is multiplied by per unit price of the goods to find out sales amount. For example, price of a book is $ 20, if total 150 books have been sold out, then 150x$20 = $3000. Here, $3000 is gross sales.
2. Net Sales
Net sales are calculated by deducting sales returned (if sold out goods is returned back) and discount (if given to customers) from gross sales amount. For example, 5 books were returned back, so sales return is 5x30=$150. If total discount is given $50, then sales return $150+Discount $50= $200 should be deducted from gross sales, hence net sales= $3000-200= $2800.
3. Cost Of Goods Sold
A firm has to bear different expenses in the process of selling goods to customers. Under this include cost for production or purchase, cost of distribution, cost for promotional activities. While calculating selling cost, purchase cost is added to the stock remained at the beginning of the current year. Then distribution cost and promotional costs are added to it to find out the total cost of the goods available for sale. And then the final stock remained at the end of the current year is deducted from the total cost. Hence, the cost of goods sold comes out.
4. Gross Margin Or Profit
4. Gross Margin Or Profit
At first, cost of production or purchase and selling cost added together, then this amount is deducted from the amount of gross sales. The outcome is gross margin or profit. Indirect expenses need not be deducted. Net profit is calculated by deducting all kind of expenses. But if the expense exceeds the amount received from sales, then it is net loss.
5. Operating Expenses
All the expenses made on different activities in the process of sales and distribution of goods, such as selling expenses, salary to salesmen, commission, transportation charge, promotional cost, administrative and miscellaneous expenses etc. are operating expenses. For calculating net profit, the total operating expenses should be deducted from gross sales.
6. Mark-up
Mark-up is the difference between cost of good sold and selling price. For producers, per unit profit margin of the goods sold is mark-up. Similarly, for wholesalers, the amount that comes out from deducting the discount on purchasing price is the mark-up, and for retailers, the difference between purchasing price and selling price is mark-up
