If you are a part of any business, even a small one, it is important to know the terms “gross income” and “net income”. When you face the words “gross” and “net” in financial reports, gross is the whole amount, and the net is the amount when you cut off all the other costs. Continue reading to learn more about the gross income vs net income, and how to calculate each one.
What is gross income?
Before anything, you have to know what the gross income is. First of all, I have to mention that gross pay and gross income both have the same meaning. These statements refer to an individual’s total earnings before any tax or other deduction. It means you can count all your different source incomes in this category, whether from your employment or not. Also, it should not always be in cash, but it can be any property or service that you received. In the case you want to estimate the gross income of a company, it is interchangeable with gross margin or gross profit.
What is net income?
Now, if you want to find your net income, you have to subtract all the following from a company’s total income:
- All operating costs
- Price of Goods Sold
Finding a company’s net income means understanding how well they manage the profit like earnings and expenses. Also, the net income number occurs on a company’s income statement and shows the company’s profitability.
Gross income vs net income example
Here is an example of net income and gross income to understand this subject better. As you previously read the gross income is the whole amount of money a company earns in a given time. Here is an example of gross income for better understanding: Imagine a case that your monthly salary is $3,500, but you receive a check less than this amount at the end of the month; whatever the check is, your gross income is $3,500.
But the net income means the money you receive each month, not how much you work. In the above example, you work for $3,500 in a month, but you receive a check of $2,500 at the end. Now, your net income is that $2,500 check.
How To Calculate Gross Profit
I think nothing is easier than figuring out your gross income. If you are paying monthly, your gross income is the salary you achieve at the end of the month. If you receive an annual salary and need to find your gross monthly salary, just divide that annual amount of salary by 12, the result is your monthly gross income.
If you are among people who receive a month for an hour that you work and want to figure out your monthly gross income, do like this. First, you have to find how much you’ve paid for a week. Now, examine how many hours you work in a week, and use the below formula to find your salary in a week, then count four of this amount.
Weekly salary = Hours per week x Hourly pay rate
How To Calculate Net Income
Opposite of gross income, calculating net income is not so easy. You know that net income means the company’s total profits after subtracting all other costs. You might have heard that some people refer to net income as the “bottom line” because its location is at the bottom of the income report. Totally businesses use their amount of net income to pay shareholders, invest in further projects or supplies, pay off debts, or hold for the prospective goals.
You can calculate your net income in three different formulas:
The formula for calculating net income is:
Revenue – Cost of Goods Sold – Expenses = Net Income
Gross Income – Expenses = Net Income
Total Revenues – Total Expenses = Net Income
The number you find out as the net income might be positive or negative. In this case, your company revenues amount to be higher than expenses, meaning you have a positive net income. But if your whole expenses are higher than your revenues, it means a negative net income or a net loss.
Limitations of gross income vs net income
When you want to study gross vs net income, it is necessary to consider the limitations of gross income and net income. One of the most important limitations of gross profit is that it does not apply to all companies and industries. Imagine a services company that does not have production costs of goods sold, so you can not calculate the gross income.
Net income is a more complicated measurement, but it has some limitations, too. For instance, when a company sells a building, the funds from the sale of the asset would boost net income for that time. Now, if investors only look at net income, they might misunderstand the company’s profitability as a growth in the sale of its goods and services.
Gross income vs net income
Here I made a list of the differences of the net vs gross to make sure that you have understood the gross income and net income.
|GROSS INCOME||NET INCOME|
|Meaning||The whole amount of money any person or company receives as salary or income without any deductions or expenses.||The rest of the income is obtained after deducting all expenses and taxes from gross income.|
|Computing||Sales – Cost of goods sold||Gross Income – (Expenses + taxes)|
|Interdependency||Gross Income does not depend on Net Income.||Net Income depends on Gross Income.|
If you have a business or even work as a simple employee, one of the important factors that you have to know is how much is your gross and net profit. To know more about this subject read the above text. There, you can find essential and useful information about net income vs gross income, how to calculate them, and some examples.