The terms, gross and net are commonly used every day in our lives. In this story, you will learn more about them as well as difference between gross and net profit and income.
Irrespective of whether you are a freshman who has just finished college or an entrepreneur, you must have come across the terms gross and net. When we speak in business terms, these are the most commonly used accounting terms, yet there are several people who still find it difficult to understand these concepts.
The difference between gross and net lies in the numbers, so to say. This story attempts to establish the distinguishing points between the two.
Basics
Gross means your total earnings, all the sources from which you receive money, be it income you receive from your employer or the total revenue you generate from your business in a specified period. If you are a businessman, you can easily calculate it by multiplying the total units you have sold by the price of the product.
The total amount which you get, is the gross earning which you have earned from your business. In case you are employed, the gross salary includes the basic salary and other commissions and bonuses, which may have been offered to you during a specific period.
On the other hand, 'net' means that the expenses, which you may have incurred are deducted from the gross income. In simple terms, it is the actual amount, which you earn in a specified period.
If you are a businessman, it would mean that you deduct your operating expenses, like cost of raw materials, salary of employees, electricity bill, advertisement fees, legal fees, taxes, etc., from the gross income.
Net income also means the profit you gain out of your business. For employees, net income would mean dues, like health insurance, social security fund, withholding fund, taxes etc. They differ as per your income and the organization which you work for.
Difference Between Gross and Net Income
The terms gross and net incomes are basically used while you are filing for taxes. As mentioned above, whatever you earn is the gross income. It is the amount you earn from working in a company and from other sources like investments and part-time work. Now, you can't have all what you earn for yourself.
You will have to pay taxes to the government and will also include money you would need to pay for various social security measures. After all these are deducted, the amount which remains is the net income which is left for you.
Difference Between Gross and Net Profit
The main motive of a business is profit. Terms like gross margin and gross profit margin are commonly used. These two terms are one and the same thing, it's only the difference in terminology.
Some people prefer using the term gross margin instead of the term gross profit margin. The mention of the word profit is avoided as administrative and selling expenses also need to be covered.
Gross profit is nothing but the total earnings of a company from all sources. When a company produces something and sells it, they get some revenue. The total revenue generated from selling all that is produced within a specific time period say a month, is the gross profit. This does not include the expenditure of the company.
On the other hand net profit means, the actual profit which a company earns. As a businessman you have to buy several things, be it alteration of some other product, buying something or paying for running your machines. All these incur costs and you have to pay for them. These expenses are deducted from the total earnings and whatever you are left with is the net profit.
Thus the difference between gross and net, be it income or profit is the amount which is left to you after all the deductions have been made.