Gross vs Net
Net refers to the portion of something that is left over after certain deductions are made, whereas Gross refers to the entire amount of something.
What Is Gross Vs. Net
“Gross” and “Net” are important financial terms. Both refer to money. It is crucial to understand their importance and when to use them.
| Gross | Net |
|---|---|
| Total amount BEFORE deductions, the unadjusted value of something. | Amount AFTER all deductions are made, the adjusted value of something. |
| Gross profit is the amount generated after all manufacturing and selling costs, known as the cost of goods sold, are deducted. | Net profit is gross profit minus operating expenses and taxes. |
| Gross revenue is the amount of money gained from sales. | Net revenue is equal to gross revenue minus returns and discounts. |
| Gross earnings are the total earnings before factoring in the expenses. | Net earnings are synonymous with profit, which is the profit a company makes. |
| Gross margin is the profits a company makes from its core operations. | Net margin is the ending profitability a business makes after including operating costs and taxes. |
| Gross assets are the total assets an entity owns. | Net assets are the gross assets less liabilities. |
| Always smaller than gross values since net values take deductions into account. |
Gross and net values impact decisions. On a firm scale, the firm must utilize its gross and net values in different tax documents. It is key that they know when to use what and why a certain value is used. Is it for the total value before deductions or after?
On an employee scale, the employee must understand whether to use gross or net pay for budgeting.
This article will cover everything about gross versus net. It is not a tricky concept, but being clear about the two terms earlier rather than later is beneficial. These two terms impact financial statements, financial decisions, and taxes.
A solid grasp of these terms will help with personal finance, business activities, and decision-making. This article will explain the difference between the two and their importance. The two terms will be utilized with income.
Key Takeaways
- Gross income is the total income before anything is subtracted.
- Net income is the remaining income after deductions are subtracted.
- Gross income is useful for analyzing sales.
- Net income is useful for analyzing profitability.
- Both gross and net income are used in taxes and financial statements.
What Are Assets And Revenues
Before we discuss income, let’s get into other variations of gross and net. Let’s discuss assets first. Gross assets are what it sounds like. It is the total value of assets a business or individual has.
Common assets to factor into the calculation of gross assets are buildings, land, cash, and cash equivalents, which are mezzanine investments. Just simply add up the values of the assets, and that is gross assets.
Net assets are a little different. To obtain this figure, take the gross assets figure less its total liabilities. Some liabilities are accounts payable, accrued liabilities, and taxes payable. In essence, net assets are the difference between what you own and what you owe.
Net assets are interchangeable with the phrase ‘net worth.’
That covers the two forms of assets. Now, let’s discuss revenue. Gross and net revenue are different.
Gross revenue is the exact dollar amount a business brings in through its sales. It is important not to get carried away by gross revenue. Sure, the sales might have been outstanding. But the more important number is net revenue.
Net revenue is gross revenue less refunds, returns, and other items. This tells a better story of how the company did and if it is profitable.
It is important to understand gross and net assets and revenues.
What Is Gross Income
Gross income is the business’s total earnings before any deductions. This is the figure reported before accounting for any expenses. Remember that gross income is not to be confused with gross pay. Gross income is for businesses, and gross pay is for an individual’s income.
Your income before taxes is gross pay, not gross income. Going back to gross income, there are several sources.
Gross income can come from:
- Business income
- Interest
- Capital gains
- Royalties
- Real estate rental income
- Dividends
The equation for gross income is rather straightforward. There are no deductions to make yet.
Simply add up the income figures from the sources mentioned above of gross income.
Gross income is a key figure for businesses and individuals. Remember, for individuals, the technical term is gross pay.
1. Sales performance
For businesses, tracking gross income can show their sales. Businesses can gain insights into their performance and how to grow.
2. Areas of improvement
Since no deductions are taken into account for gross income, businesses can assess their accurate, actual sales. This is the raw revenue brought in by sales. This can highlight patterns in sales, allowing the company to better its decisions and strategies.
3. Sales quotas
Businesses may also track how well they perform in comparison to their quota for the respective sales period. This allows the sales team to identify areas of improvement.
Gross income is great for seeing how a business’s sales team does. Tracking gross income unlocks new opportunities to better efficiency, optimize resources, and grow.
Here is an example of how to obtain gross income.
| Particulars | Amount |
|---|---|
| Salary | $100,000 |
| Royalties | $23,600 |
| Real Estate Rental Income | $15,000 |
| Dividends | $1,200 |
Gross income = Salary + Royalties + Real estate rental income + Dividends
Gross income = $100,000 + $23,600 + $15,000 + $1,200 = $139,800
What Is Net Income
Gross income was the full pizza. Net income is what’s left after the manager and government take a few slices.
The business is left with its net income after all expenses and taxes are deducted from its gross income. In other words, this is the cash that it has earned. This represents the business’s profitability.
Calculating net income is more involved than gross income. First, start with the gross income.
Then, make the according pre-tax and post-tax deductions. What’s left is the taxable income. From this amount, federal, state, and local taxes are deducted.
The amount left over is the net income. It is the profit made by a business in a given period.
1. Profitability
Net income is important. It reflects profitability, as mentioned before. If the net income figure is a positive number, then the business is making a profit as the revenues exceed the expenses.
The business will make a loss if the net income is negative. In this case, the expenses exceed the revenues. From the net income figure, businesses can make appropriate decisions.
Net income also provides a business’s profit margin. Profit margin is a ratio that equals the net income divided by total revenue multiplied by 100. The metric displays how well a company’s revenue translates to profit.
Profit margin is used by analysts and investors to compare firms within the same industry.
Note
A higher profit margin indicates greater cost control and larger profits relative to revenue.
Net income is a useful tool to assess financial health. Lenders and creditors use net income to see if the business is worthy of a loan. What is the business’s creditworthiness? The net income figure answers this question.
Net income provides a holistic snapshot of a business. Multiple insights are provided based on the business’s performance in the accounting period.
Here is an example of how to obtain net income.
| Particulars | Amount |
|---|---|
| Gross Income | $139,800 |
| Pre-Tax And Post Deductions | $63,600 |
| Federal, State, And Local Taxes | $25,000 |
Net income = Gross income - Pre-tax and post-tax deductions - Federal, state, and local taxes
Net income = $139,800 - $63,600 - $25,000 = $51,200
Gross Vs. Net Calculator
Let’s work through two scenarios where we can understand gross and net.
Scenario 1: A startup owns land worth $2 million, a building worth $890,000, and a $500,000 mortgage. What are its gross and net asset values?
Gross assets = Land real estate + Building real estate
Gross assets = $2 million + $890,000 = $2.89 million
Net assets = Gross assets - Mortgage
Net assets = $2.89 million - $500,000 = $2.39 million
The gross asset value is $2.89 million ($2 million + $890,000), and the net asset value is $2.39 million ($2 million + $890,000 – $500,000).
Scenario 2: The startup also reports a rental income of $100,000 per year, interest payments of $150,000, salaries of $250,000, and taxes of $300,000. What are its gross and net incomes?
Gross income = Salary + Royalties + Real estate rental income + Dividends
Gross income = $0 + $0 + $100,000 + $0 = $100,000
Net income = Gross income - Pre-tax and post-tax deductions - Federal, state, and local taxes
Net income = $100,000 - $150,000 - $250,000 - $300,000 = -$600,000
The gross income is $100,000. The net income is -$600,000 ($100,000 – $150,000 – $250,000 – $300,000).
Gross Vs. Net In Conversations
We have discussed what gross and net are. Now let’s discuss how they are different.
1. Terminology
Gross income is the total earnings before any expenses. This is the raw income. Net income is the final profit. This is gross profit minus all deductions.
2. Taxes
Both of these serve important roles in taxes. Gross income is the mere start when calculating taxes. After deductions are factored in, the taxable income is then analyzed.
Since taxes are levied in brackets, based on the bracket the taxable income is in, taxes are assessed. Information about the brackets can be found here.
After paying taxes, the remaining income is the net income.
3. Expenses
Gross income does not consider any expenses. On the other hand, net income takes all expenses, direct and indirect expenses, into account.
4. Purpose
Gross sales are useful for understanding sales performance and a business’s core operations, while net sales display the business’s overall profitability.
Conclusion
Do not get the two confused. Gross income is the total revenue before deductions. Net income is the final profit.
Both figures can help assess businesses, allow businesses to reach their goals, and provide information to stakeholders to make informed decisions.
When it comes to applications, the two are useful in different cases.
Gross income is great for breaking down sales, particularly total sales revenue. Growth patterns and sales can be improved based on this figure. Gross income does not show whether a company is making money or not.
Net income is useful for other uses. This shows whether the company is making money. It shows profitably. Unlike gross income, net income does not give insight into sales. Net income is useful for valuing businesses as it determines a company’s creditworthiness.
Gross income is more insightful for sales, while net income is more insightful about the overall business’s performance. The two complement each other.
Hopefully, this article helped clear up the differences between gross and net income.
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