Gross vs. Net for Salary Pay | Income Earnings | Profit | Sales Revenue | Weight | Rent | Price ... and more
What’s the difference between gross and net when it comes to your money and business?
The relationship between gross and net is reflected in the following formula:
GROSS VALUE – DEDUCTIONS = NET VALUE
The good news is that the main difference is just this simple and easy to understand.
The bad news is that in practice Gross vs. Net can get much more confusing because they have a huge number of different meanings.
These 5 examples of gross & net are just the tip of the iceberg:
So, this guide will clear up any confusion and help you:
You’ll hear the terms gross and net all the time in business, accounting, finance – but also your day-to-day life.
For example, both gross and net income refer to the earnings of a person or a company, but each term refers to the income from a different perspective:
|Gross vs. Net: Example - Income|
|Gross Income||Gross income describes the total earnings before any deductions, such as cost of sales, expenses, depreciation and taxes.|
|Net Income||Net describes the income a company or individual is entitled to after all deductions have been taken into account. Technically, net income is the money that the company or individual gets to keep after paying all of its creditors (e.g., suppliers, employees, tax authorities, loan providers).|
The terms gross and net can be both used as adjectives and verbs, while net also functions as a noun.
|Gross vs. Net: Difference|
|Gross||Gross means the whole of something (e.g., overall total sum amount; entire complete full object) generated (e.g., made, earned or owned) as a result of some activity (e.g., sales, income, salary, profit, price, weight or estate)|
|Net||Net (or nett) means the final value that remains left over from the gross whole after all relevant deductions are made (e.g., cost of sales, expenses, charges and tax)|
The net amount is the lowest and totally conclusive amount where nothing further is allowed to be subtracted.
Consequently, the gross amount is always larger than net figure, because it does not take into account anything that needed to be spent or deducted along the way.
As a very simplistic example, let’s suppose that Jane sets up a lemonade stand in front of her parents’ house one Sunday.
Jane buys sugar, fresh lemons and mint to make the lemonade for $10.
That Sunday, Jane manages to sell 35 cups of lemonade to the neighbours for $1 each.
Not bad for one Sunday’s worth of work.
Here are two simple tricks to remember the difference between gross and net:
An easy way to remember which word means what is:
Simply associate the lengths of the words to the amounts of money they refer to.
On a salary payslip, the net pay refers to the money an employee is left with after all the required deductions are made (e.g., tax, social security, pension, insurance).
As a result, the net pay is also called the “take home pay”.
So, just remember the phrase “neT income is Take home pay” whenever you need to remind yourself of the difference between net and gross.
There is an overwhelming number of terms that are referred to as net or gross in finance, accounting, business and just our everyday lives.
Keep reading this article for the explanation of the 10 most important and widely used Net vs. Gross differences:
When it comes to income, the meaning of gross and net is different depending on whether we talk about a business earning revenue or a person earning wages.
First, I’ll explain what gross and net income means for companies:
|GROSS Business Income in Company Financial Statements|
|Also known as:||Gross Income, Gross Revenue, Gross Profit, Gross Earnings, Gross Profit Margin or Top Line|
|Meaning:||Gross income is revenue from all sources of a company after deducting its cost of revenue.|
|Formula:||Gross income is revenue minus cost of revenue|
|NET Business Income in Company Financial Statements||Also known as:||Net Income, Net Profit, Net Earnings, Net Profit Margin, Net Revenue or Bottom Line|
|Meaning:||Net income is the bottom line profit made by a business after deducting all expenses from all revenue.|
|Formulas:||Net income is gross income (= revenue – cost of revenue) minus all other expenses (= operating + non-operating expenses + tax)|
|Net income is all revenue minus all expenses (= cost of revenue + operating expenses + non-operating expenses + tax)|
Let’s put this into the context of a company’s Income Statement:
|Income Statement||Details / Explanation|
|Revenue||= (Sales Revenue + Other Revenue)|
|(Less) COGS||aka Cost of Goods Sold = Cost of Sales = Cost of Revenue|
|= Gross Income||aka Gross Profit = Gross Earnings = Gross Profit Margin|
|(Less) OPEX (= Operating Expenses)||1. Overheads|
|2. Selling, general and administrative expenses (SG&A)|
|3. Other operating expenses|
|= EBITDA||aka "Earnings Before Interest, Tax, Depreciation and Amortization"|
|(Less) Non-Operating Expenses||= (Depreciation + Amortization + Interest charges + Other costs of borrowing)|
|(Less) Depreciation||= (Depreciation + Amortization)|
|= EBIT||aka "Earnings Before Interest and Tax"|
|(Less) Interest||= (Interest charges + Other costs of borrowing)|
|= EBT||aka "Earnings Before Tax" = Pre-tax Income|
|(Less) Taxation||= (Income Tax + Other Taxes)|
|= Net Income||aka Net Profit = Net Earnings = Net Profit Margin|
The gross income figure does not always reflect the true profitability of a company because it does not take into consideration the full cost of doing business.
To illustrate this point, consider these two scenarios:
1. Company’s financial statements show growing gross income but decreasing net income.
The Company may have issues with managing operating expenses, non-operating costs or taxation.
2. Company’s gross profit is static or even decreasing, while its net profit figure has increased:
The Company may have cut down on operating expenses, saved book money on depreciation, or saved real money on borrowing charges and taxation.
As a result, managers, analysts, investors and other stakeholders tend to consider both of the profit measures–gross and net–together and analyse the results in conjunction with other relevant financial and non-financial indicators of a business’ success.
Company XYZ Income Statement
>> Gross Income = $10M – $3M = $7 million
>> Net Income = $10M – $3M – $2M- $1M- $0.5M = $3.5M
Gross / net income has a different meaning depending on whether we talk about a company earning revenue from sales or a person earning pay from salary or wages. Here, let’s focus on individuals:
|Paycheck: Gross vs. Net Income - Payroll Salaries & Wages|
|Gross Pay||A person’s full-pay, meaning the total income earned before taxes and other deductions.|
|Net Pay||A person’s take-home pay attained after all deductions, including statutory withholdings, employee pre-tax benefits and voluntary payments.|
Payroll income may include:
Payroll deductions may include:
Deductions can be mandatory or voluntary and calculated either pre-tax or after-tax, depending on the specific requirements.
Logically then, the gross earnings on a paycheck are always higher than the net pay the eventually worker walks away with every month.
For example, even though your annual salary might be $60,000, which equals to $5,000 per month, only $3,500 hits your bank account every month. This means that your gross income is $5,000, while your net income–or “take-home pay”–is $3,500.
|Gross vs. Net: Sales Revenue|
|Gross Revenue:||Gross revenue means the total sales revenue from all sources before any items are netted out (e.g., refunds and returns).|
|Net Revenue:||Net revenue refers to the sales revenue figure after all relevant items (e.g., refunds and returns) are netted out from the gross revenue.|
Sometimes, sales revenue is referred to as income or earnings–as described in the Income section above.
|Gross vs. Net: Profit|
|Gross Profit:||Gross profit is the difference between revenue and the direct cost of making the product or providing the service that generated that revenue. Gross Profit is also referred to as Gross Income, Gross Revenue, Gross Earnings, Gross Profit Margin or Top Line.|
|Net Profit:||Net profit is the difference between total revenue and total cost of running a business, as opposed to just the costs directly associated with creating a product or service. Net Profit is also referred to as Net Income, Net Earnings, Net Profit Margin, Net Revenue or Bottom Line.|
Profit margin is an indicator of a company’s profitability that technically means “percentage of revenue”. However, the term is often used interchangeably with the words income, revenue, earnings, profit and top/bottom line.
|Gross vs. Net: Profit Margin|
|Gross Profit Margin:||Gross profit margin, GPM or just gross margin, is gross income divided by total revenue, showing the gross profit as a percentage of revenue.|
|Net Profit Margin:||Net profit margin, NPM or just net margin, is net income divided by total revenue, showing the net profit as a percentage of revenue.|
In other words, this ratio reflects how much gross and net profit a company makes per dollar of sales.
Another one of the many financial statement elements that are commonly referred to as gross or net are assets:
|Gross vs. Net: Assets (GAV / NAV)|
|Gross Asset Value (GAV):||Gross Asset Value represents the total value of an entity’s assets before any deductions.|
|Net Asset Value (NAV):||Net Asset Value represents the value of an entity’s assets after the deduction of certain liabilities.|
As an example, GAV and NAV are commonly used to measure the value of assets within investment funds, such as mutual funds, exchange-traded funds (ETFs), property funds or real estate investment trusts (REITs). In regards to the latter, for instance:
|Gross vs. Net: Price|
|Gross Price:||Gross price is the full value of a product or service quoted by a seller before any deductions, such as discounts and promotions. Gross price is also sometimes known as a list price, catalogue price, SRP (suggested retail price), or MSRP (manufacturer's suggested retail price).|
|Net Price:||Net price is the actual amount paid by a buyer for a product or service after all taxes and surcharges (e.g., shipping, duty, service, installation, royalties, added value) are added; and all discounts (e.g., concessions, rebates, volume, early-payment) and other deductions are subtracted from a list price.|
|Gross vs. Net: Costs|
|Gross Cost:||Gross cost is the full cost of acquisition, which aggregates all the costs associated with purchasing an item. For example, the gross cost of buying a piece of equipment includes the purchase price as well as the sales tax, transportation, assembly, testing and employee training.|
|Net Cost:||Net cost is the total cost of acquisition, reduced by any benefits gained from the ownership of the acquired item. For example, the net cost of a machine is its gross cost minus the margin on all products made with that machine and the salvage value obtained from its ultimate sale.|
Another example of gross versus net could be the cost associated with attending college, such as a full-time MBA program:
Calculating and comparing gross vs. net cost is very beneficial in assessing two potential purchases that have a similar list price, but the full cost of the purchase or the cost/benefit analysis may be drastically different.
|Gross vs. Net: Debt|
|Gross Debt:||Gross debt is the total book value of a company’s the debt obligations.|
|Net Debt:||Net debt is the total debt of a company less any cash and cash-like assets, measuring the company’s ability to pay all of the debt obligations with its existing liquid assets if they were due today, serving as an indicator of financial health and liquidity.|
|Gross vs. Net: Loans|
|Net Loan:||Net loan is the actual amount of money paid out by the lender and credited to the borrower’s account, which the borrower can use for its financing needs.|
|Gross Loan:||Gross loan is the full amount of debt comprised by both the principal and the cumulative interest payable, along with any processing fees, insurance for loss of income or life, and any other related costs that the borrower incurs as a result of taking out the loan.|
Consequently, the gross loan amount is always higher than the net amount.
Estate calculations are often used to work out the net worth of a deceased person for the purpose of inheritance tax.
|Gross vs. Net: Estate|
|Gross Estate:||Gross estate is the total market value of all the assets in a person’s estate before the deduction of any costs and taxes.|
|Net Estate:||Net estate is the market value of the assets in a person’s estate after deducting all relevant taxes and costs (e.g., outstanding debts, administrative fees, funeral expenses).|
|Gross vs. Net: Weight|
|Gross Weight:||Gross weight refers to the total weight of goods, including their internal packaging (e.g., carton, bottle, can, bag) and external packaging (e.g., box, pallet, crate).|
|Net Weight:||Net weight is the base weight of the actual product by itself, without its packaging.|
At a macro level, the terms gross and net are also used when assessing the financial situation of a country.
|Gross vs. Net: Government Debt|
|Gross Debt:||Gross debt of a country is the overall amount of debt a government of that country has taken on.|
|Net Debt:||Net debt is the gross debt of a country minus any financial assets a government holds, such as gold reserves and accounts receivable (e.g., securities, insurance, pensions, loans).|
|Gross vs. Net: Country's GDP/NDP|
|Gross Domestic Product (GDP):||Gross Domestic Product (GDP) refers to the measure of national economic output calculated as a sum total of all goods and services produced in a country in a specific period of time.|
|Net Domestic Product (NDP):||Net Domestic Product (NDP) refers to the measure of national economic output adjusted for depreciation by subtracting depreciation of all capital goods in the economy of a country from its GDP (gross domestic product).|
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