Gross income and net income are two terms heard commonly when discussing the growth or major losses in a business firm or company.
These two terms are closely related but have small differences between themselves that make their usage vary according to situations.
It gives insights into the profits and losses that a company face or even the growth of the firm.
Gross vs Net Income
The main difference between gross and net income is that while in gross income the value given is the total monetary output of the company, in the case of net income the monetary value shown as the profit or loss of a company is given after the total calculation which includes subtracting the cost needed in the whole process of producing or manufacturing along with other expenses.
Gross income is the best way to figure out the profitability of a company in terms of its income inflow and revenue additions. It might not exactly be the actual amount that the company might be left with as the major profitable share as other elements are need to be taken out in the form of expense from the amount calculated as gross income.
Net income is the best way to define the performance factor of a company or business firm as it is the amounts that go back into the business for further production. The end amount after deducting a few other expenses that were acquired in the process of providing the service or sales is the net income.
Comparison Table Between Gross and Net Income
| Parameters of Comparison | Gross Income | Net Income |
| Formula for Calculation | Gross money value – COGS | Gross income – all the expenses incurred |
| Indicates the Balance of | Trading | Profits and loss |
| Major Advantage | Helps in controlling the amount of money input for production and manufacturing | Can create a graph showing growth |
| Aim | In finding the profit | To identify the company’s performance |
| Reliability on the Outcome | Reliability is pretty low as not all expenses are deducted | Is highly reliable |
What is Gross Income?
Gross income is also called gross margin or gross profit depending on a few factors.
The name changes with the circumstances of usage. This business term could be used in connection with a whole company or just an individual.
The overall amount of revenue that is plowed back to the company after the sales is called gross income.
It might not always be sales alone but other service-providing units can also define their income in terms of gross value.
Gross income is calculated over a while. This period changes from company to company.
The most common calculating period is yearly and quarterly.
Calculating the gross income in such short periods would allow the firms to evaluate their performance.
After the gross income of a company is calculated, there are usually changes made in the sales and manufacturing units of the company.
Gross income is calculated by subtracting the cost of goods sold (COGS) from the total income that the company gains from sales.
The rest of the expenses like tax and employee salaries are all included in the calculated gross income.
COGS is the total value of everything that has been used while in the production of the goods to be sold or the service to be provided.
That is the cost required for packing if it is a product such as groceries.
That being said, gross income is needed to calculate the net income. This is an added advantage of net income.
Because of the presence of gross income, while calculating net income, it becomes easier to evaluate the position of the company’s overall pace.
Sometimes net income can be called the leftover of the revenue that has been acquired by the company.
The monetary values deducted from the gross income to get the net income might seem meager.
But they were all amounts spent while goods were being made.
It includes the taxes that are given to governmental organizations for the production or taxes that apply at times of transport like road tax.
The payroll of employees who are not directly linked to the company such as those who drive the transport truck etc are also included in the deducted value.
The amount required in the maintenance and purchase of types of equipment used in the manufacturing of goods is included too.
In terms of services, the people who provide communication and help and are hired through agencies for short-term works need to be paid.
Such payments fall in the deducted value.
Main Differences Between Gross and Net Income
- While gross income indicates the business unit’s ability to increase the income flow, such is not exactly the purpose of net income because net income shows the profits gained over a while.
- With the calculated gross income value, a company can concentrate on areas where it can minimize the spendings done on COGS and also create a bigger sale value but such can’t exactly be done with net income.
- Gross income is needed in the calculations of net income value whereas net income isn’t needed for the calculation of gross income.
- The gross profit can’t be considered as a reliable value to calculate the profit but net income could be considered as it always is the final and completely leftover amount.
- Gross income is always greater than net income for any given company or individual.
Conclusion
Since both gross and net income has similar meanings, understanding the difference between them is the key to a business’s success.
Both the values are interdependent as without one the other would be hard to understand and help in the company’s development.
Figuring out the difference between them can help increase the monetary flow of a company thereby giving them major profits.
The financial stability of any company or even individuals depends on the management of the gross and net income values practically.
The period during which the gross and bet incomes are calculated might vary depending on the company’s interest.
A smaller period may indicate a company’s rapid growth as they are keeping a keen watch over their finances.
References
- https://apps.bea.gov/scb/pdf/2004/04April/0404PI&AG.pdf
- https://www.sciencedirect.com/science/article/pii/S0165410198000330