Gross Income vs Net Income

 

Difference between Gross Income vs Net Income

The meaning of gross income vs net income varies depending on whether we are considering a business or it is regarding a wage earner. If we consider a business then gross income is equal to gross margin which is calculated as sales minus the cost of goods sold. Thus, gross income can be defined as the amount which a business earns from the sale of goods or services before selling, administrative, tax, and other expenses have been deducted. Whereas net income can be defined as the leftover or residual amount of earnings after all the expenses have been deducted from sales.

For example, let u suppose a business XYZ Ltd. has sales of $1,000,000; a cost of goods sold of $600,000, and selling expenses of $ 250,000. Then for company XYZ Ltd., the gross income is $400,000 and its net income is $150,000. If we consider a wage earner then gross income is the total amount of salary paid to the individual by the employer before any deductions are made. Net income is the number of earnings that is left after all adjustments and appropriations are made from the gross pay like payroll taxes, retirement plan contributions, etc.

For example, Ramesh earns wages of $1,000, and $ 300 in deductions is taken from his wages for retirement contributions. Then his gross income is $1,000 and his net income is $ 700.

Head to Head Comparison Between Gross Income vs Net Income (Infographics)

Below is the top 6 difference between Gross Income and Net Income:

Key Differences between Gross Income vs Net Income

Let us discuss some of the major Differences Between Gross Income vs Net Income:

• The total amount of income without deducting any expenses is known as gross income. The residual amount after deducting taxes and other expenses is known as net income.
• The gross income I always higher in amount than net income since no deductions are made.
• We can get a net income after doing all adjustments and appropriations from Gross Income. All the expenses are deducted to arrive at net income.
• The most important point of difference between Gross Income vs Net Income is that net income is always dependent on gross income.
• The operational expenses of a business are deducted from the gross income while all the non-operational expenses are deducted from net income.
• Gross income is always recorded at the top of the income statement but net income is always mentioned at the bottom of the income statement.
• Gross income is the amount without any adjustments and appropriations while net income is the amount left after reducing all expenses, interest, taxes, losses, and appropriations like a dividend.

Comparison Table of Gross Income vs Net Income

Below are the 6 topmost comparisons between both:

Basis of comparison	Gross Income	Net Income
Definition	It is the total income of any business or individual without any deductions or expenses.	It is the residual income that is obtained after deducting various expenses and taxes from the gross income.
Calculation Method	It can be calculated in the following way: Sales- Cost of goods sold.	This is calculated in the following manner: Gross Income- (Expenses+ Taxes).
Dependency	Gross income is independent of net income.	Net income, on the other hand, is dependent on gross income.
Amount	This amount is high as no deductions are made.	This amount is comparatively less as all the deductions are made.
Type	Operational	Non-operational
Position in the Income Statement	Gross income is always reported near the top of the income statement.	Net income is reported at the bottom of the income statement and is referred to as the bottom line.

Gross Income vs Net Income in Running Business

Both the gross income and net income are recorded in the financial statement-one at the top and the other at the bottom. The financial statement not only helps to understand a company’s position but also helps the investors and lenders to understand the exact viability of the company in the financial market, so both Gross Income and Net Income are very much important.

For a smaller business, these two figures help to understand the financial picture in the long run as well as identify areas and ways to control expenses so that the business can thrive and grow. These figures also help to know the areas of business which are lucrative so that improvements can be made.

Conclusion

Keeping a track of the gross income and net income is the key to having a successful business. It helps to know when to increase the rates, whether specific expenses are mandatory or not and the target clients and projects on whom the business must focus on progress in the long run. Both gross and net income is intertwined since without gross income you cannot get net income. Both gross income and net income are very important components of a financial statement and hence of financial analysis. These two components help a business to analyze how effectively and efficiently the company’s resources are allocated.

Recommended Article

This is a guide to Gross Income vs Net Income. Here we discuss the Gross Income vs Net Income key differences with infographics, and a comparison table. You may also have a look at the following articles to learn more –

1. Direct Tax vs Indirect Tax
2. Financial Planning Success
3. Financial Analytics
4. Revenue vs Net Income