Gross, as the name suggests is the entire amount received by the entity from any activity, without giving effect to deductions like expenses. Gross income means the amount by which revenue of the company supersedes cost of production. On the other hand, net is termed as the actual value left after giving effect to the deductions such as expenses. So, net income implies the actual income earned by the company after subtracting all expenses and losses.
The terms gross income and net income is very commonly used in business, accounting, and financial context. Even in taxation too, the terms are equally important, as they determine the taxable income of an individual or entity. Therefore, an individual should know the difference between these two, for handling finance in a better way.
Content: Gross Vs Net Income
|Basis for Comparison||Gross Income||Net Income|
|Meaning||Total income of any person or company without any deductions or expenses.||The remaining income which is arrived after deducting various expenses and taxes from gross income.|
|Calculation||Sales - Cost of goods sold||Gross Income - (Expenses + taxes)|
|Interdependency||Gross Income is not dependent on Net Income.||Net Income is dependent on Gross Income.|
|Deduction of Expenses||Operational||Non-operational|
Definition of Gross Income
The term gross income can be used for both, an individual and a company’s income. As we talk about the gross income of an individual, it is the amount that is received by him from all sources (salary, profit, capital gains, rental income and any other form of income like pension, etc).
Now, if we talk about the gross income of a company, it is the total of all receipts earned by the company excluding various costs charged for producing and bringing goods into the present location and condition. It is the income without any adjustments and appropriations.
Definition of Net Income
The term net income can also be used for both, an individual and a company’s income. The net income of an individual, is the amount left after all deductions from the gross income, but if we discuss about net income of a company it is the amount left after reducing all expenses (selling & distribution, office & administration), interest, taxes, losses and other appropriations (like dividend).
It is the amount left after all adjustments (i.e. Provisions). In this, the non-operational income is also included in rental income, profit from the sale of assets.
Key Differences Between Gross Income and Net Income
The paramount differences between gross income and net income are discussed as follows:
- The amount of income without reducing any expenses is gross income. The amount left after reducing expenses is known as net income.
- Gross income is always higher than the Net income.
- Net income arrives after all adjustments and appropriations from Gross Income.
- The major difference between gross and net income is that net income is always dependent upon gross income.
- Operational expenses are reduced from Gross Income while Non-operational expenses are reduced from Net Income.
- Helps in identifying significant expenses of the business.
- A complete analysis of business income.
- Based on revenue
- Calculated for a particular period
The two types of business income are closely intertwined, as net income, it is a part of gross income. For calculating net income, calculation of gross income is a must and this is why they are not contradictory. Both have its relevance in their place, and both are a part of the financial analysis of business income. The two entities are calculated for a particular financial year and helpful in making comparisons. The two entities are advantageous in analyzing that how effectively and efficiently the company’s various resources are allocated.