 We've learned some new accounts related to the sale of inventory. Let's recap those and add a couple new ones. Sales revenue is the amount earned from selling goods. It's a revenue account. Sales returns and allowances is the amount of buyer returns or allowed deductions from invoice price. It is a contra revenue account, which means it has a normal debit balance. Sales discount is the reduction in the amount of cash received from a customer for early payment. It is a contra revenue account, and it also has a normal debit balance. Net sales revenue is a new term. It is the amount a company has earned on sales of goods after returns, allowances, and discounts have been deducted. It is not an account, but rather a subtotal. More on this in a minute. Cost of goods sold is the cost of inventory sold to the customers. It's an expense account. Gross profit is a new term as well. It is the dollar amount goods are sold for greater than the cost of the goods. It is not an account, but rather a subtotal. Again more on that in a minute. Since net sales revenue and gross profit are subtotals, we need to learn how to calculate both. Let's look at the data we used earlier from the sale of records from RCA records to championship vinyl. Recall that RCA records sells $3,800 of vinyl records on account to championship vinyl. Let's assume that those records cost $2,400. RCA receives a $500 return of the Taylor Swift records. Let's assume that the cost of those records were $200. RCA records receive payment of $3,234 from championship vinyl, which was the $3,300 owed less the $66 sales discount. The T accounts looks like this for the revenue and contra revenue accounts. Sales revenue had a credit balance of $3,800. Sales returns and allowance has a debit balance of $500 and sales discount has a debit balance of $66. If you're wondering where those numbers came from, I encourage you to watch the video entitled Perpetual Seller. Otherwise the calculations are the same regardless of the source of the data. Net sales revenue is calculated as sales revenue minus sales returns and allowances minus sales discount. It is the most important revenue figure because it is the most meaningful to investors and creditors. Here's an example. A few years ago I sold my Audi S4. It was a sweet car and as you can see from the photo pretty awesome looking. So I figured I'd sell it for a million dollars. I mean look at it, it's cool. Unfortunately no one else thought it was as cool as I did. So I offered a $990,000 discount and sold it right away. So which amount of revenue provides better information? The million dollars of sales revenue or the $10,000 of net sales revenue? I think you can figure that out. In fact I like that car so much I replaced it with these two but that's another story. Now that we know how to calculate net sales revenue let's calculate gross profit. In order to calculate gross profit we need to first figure out the amount of costs of goods sold. In RCA records made the initial sale costs of goods sold was debited for $2,400 the cost of the records. When the Taylor Swift records were returned costs of goods sold was reduced by the cost of that inventory of $200. So the balance in costs of goods sold is $2,200 debit balance. Gross profit is the difference between net sales revenue and costs of goods sold. It represents the amount of goods the goods were sold for greater than their cost. So RCA sold those vinyl records to championship vinyl for $1,034 more than they cost RCA records. Gross margin which is sometimes called the gross profit percentage is a ratio that shows how much of every sales dollars is going to gross profit. This is very helpful for investors and creditors when they compare companies of different sizes. Gross margin is calculated by taking the gross profit in dollars and dividing it by the net sales revenue in dollars. Gross margin is one of the most carefully watched measures of profitability by internal and external users of financial data. A small increase may signal an important rise in income. Conversely a small decrease may signal trouble. For RCA records the gross margin is 32% meaning that 32 cents out of every sales dollar is going to gross margin. You'll learn more about how gross margin impacts net income in an upcoming video entitled Multi-Step Income Statement.