Gross and net usually refer to income and it is also something that seems quite difficult to understand for some people. For example, you might have someone that refers to his salary using his net outcome and someone using his gross outcome – leaving the third person in the conversation confused because of the great difference between the two values.
Before we move on, you should know that employees use these two terms to refer to their salaries and the differences between them, while businesses describe financial ratios with them.
Now, let’s clear things and explain to you exactly what gross income means and what net income means.
For a business, gross income and gross profit are basically the same things. They use these to measure the profit the company is left with after the costs of goods sold are removed from the picture, so to say.However, when calculating the gross income, selling and administrative expenses or taxes are not taken into account.
When it comes to employees, gross income is the same thing as gross pay. The gross income represents the sum that is paid to an employee before taxes and deductions hit their paycheck. Basically, this is the sum that the employer has to spend on the employee and it is not the amount that the latter gets to take home.
Net income, on the other hand, shows the amount of revenue that is left after the costs of producing those revenues are subtracted from the total amount. Basically, for businesses to round up their net income, they have to take away their total expenses from their total revenues.
This can be seen as pure profit, as it is the sum the company is left with after it has paid all of its expenses for a certain period of time.
Obviously, for the employee, the net income is the sum they get to keep and take home. Their net pay is what they are left with after employee shares, benefits, insurance, and taxes are deducted from the gross income.
The Difference between Gross and Net Income
In short, the gross income of a business represents the money it can use to pay off the operating expenses for the time being. This income results after all the costs of goods sold are paid. Then, in order for a business to round up its net income, it has to deduct the operating expenses from the gross profit. It’s only logical – first, it has to pay the costs of goods sold and then the operating expenses.
Basically, for a company, the net income is the sum that results from subtracting total expenses from total revenues – thus, profit can be seen.
For an employee, things are much simpler. The two types of income, gross and net, basically refer to the sums before and after taxes and deductions. The gross is the amount the employer has to pay for a certain employee – his expenses for him or her, while the net is the sum the employee can spend freely.