Meaning of Gross and Net
Gross means the total of something while net means part of any whole item after certain deductions. Gross represents whole structure while net reflects balancing figure.
For example, a company had revenue of $100 million while the expenses are $70 million so in that case, $100 million is known as gross revenue while $30 million ($100 million-$70 million) is known as net revenue. A diagrammatical representation of Gross and net can be understood through the following diagram:
The overall pie size is representing the gross amount while the only blue area is representing the net amount.
Meaning of Gross and Net in Various Context
In terms of business, net income is derived once all categories of business expenses such as taxes, interest, other expenses are deducted from the gross income.
In terms of the overall weight of goods, gross weight refers to total weight including packing and box weight while net weight refers to the weight of only the goods.
In terms of accounting, Gross Margin refers to profit remaining after operating business expenses while net margin refers to profit remaining after all the expenses.
In terms of economics, GDP is Gross Domestic product which means the market value of all final services and goods which are produced within a country while NDP (Net Domestic Product) is derived when depreciation is reduced from the Gross Domestic Product.
In terms of salary, Gross Salary is the Total Cost to Company (CTC) while Net salary is the amount that is paid to the employees after certain federal withholding taxes.
In terms of Assets, Gross Assets Refer to total assets before any depreciation while net assets refer to the value of assets after depreciation.
How to convert gross total into net total and vice-versa
Converting Gross total into net total:
A company is having a revenue of $50 million and expenses allowed for deduction are 40% of gross revenue so in this case:
Net Total = Gross Total – (Gross Total*Deduction allowed)
$30 million = $50 million – ($50 million*40%)
Converting Net total into Gross total:
A company is having a net income of $120 million after applying a tax rate of 40%. So, the gross income for that company can be calculated as follows:
Gross Income = Net Income /(1-Rate)
$200 Million = $120 million/ (1-40%)
Accounting Impact of Gross vs Net
In accounting terms, Gross profits refer to profits remaining after reduction of cost of goods produced and sold from the revenue of the company. It provides a measurement of how effectively the operations of the company are running. Here 2 terms are important to understand
So Gross Profit = Net Revenue – Cost of Goods Sold
Revenue = Revenue is the total amount received from sales in any particular period of time. The revenues are also of 2 types, Gross Revenue, and Net Revenue. Gross Revenue refers to listed prices without any discount, while net revenue refers to revenues after discounts.
Cost of goods produced and sold = It means direct cost involves in producing the goods for the company. Cost of Goods Sold includes direct materials consumed, Direct Labour Expenses, Factory related overheads.
Note: Factory-related overheads may include, Stock keeping expenses, repairs, and maintenance of plant, depreciation on factory building, etc.
When all the expenses and costs which the company has incurred are reduced from the total revenue of the company then it is known as net income.
Net income is also known as the bottom-line item because this is shown at the end of the income statement. For calculating the net income, the following item needs to be reduced from the total revenue:
|Sr. No.||Particulars||Amount in $|
|2||Less: All operating expenses including depreciation|
|3||Less: Interest Cost|
|4||Les: Office and Administration expenses|
|5||Less: Selling, Administration, and distribution expenses.|
|6||Less: Income Tax|
|7||= Net Income (1-2-3-4-5-6)|
Note: selling, admin, and distribution expenses may include salesman Commission, advertisement cost, sales office expenses, Office and administration overhead may include salaries for the office staff, postage, and stationery for the company, rent, etc.
Key Differences between gross income and net income
|Sr. No.||Basis||Gross Income||Net Income|
|1||Meaning||Gross income reflects the ability of the company to generate profits available for its non-operating expenses, debenture holders, equity holders, or preference shareholders.||Net income reflects the final profits from the company’s business operations. It provides a clear overview of residual income after deducting for all the expenses of the company.|
|2||Formula||Total Revenue – Operating Expenses||Total Revenue – Operating Expenses – Non-Operating Expenses|
Statement showing position of Gross Margin and Net Margin in Income Statement
Sample Format showing Gross Income and Net Income
|a||Gross Sales Revenue|
|b||Less: Sales Return Inward|
|c||Net Sales Revenue (a-b)|
|d||Less: Cost of Sales|
|e||Gross Profit (c-d)|
|g||Less: Insurance Premium|
|i||Less: Bad debts|
|j||Less: Discount allowed|
|k||Less: Rates and Taxes|
|l||Less: Travel Expenses|
|m||Less: General Expenses|
|n||Net Profit (e-f-g-h-i-j-k-l-m)|
Bottom line conclusion
Gross Profit shows the key matrix about the remaining profit after the cost of production has been reduced from the sales revenue while the net income shows the profit remaining after all the expenses have been reduced from the sale revenue of the company.
Some other matrices are also used for evaluation like net profit margin is calculated using by dividing net income by sales revenue and multiplying with 100.
It reflects % of net income generated against each dollar of sales revenue generated for the company. In a similar manner gross margin is calculated using gross profit divided by sales revenue and multiplied by 100. The term net margin is also used for the calculation of Return on Investment for the company.