In business parlance, Gross Income refers to the income arising after deducting direct expenses from sales. Whereas, Net Income implies the income left over after subtracting all the indirect expenses.
From the taxation point of view, Gross Income is the income earned from various sources by an individual or enterprise. Technically, it is the gross total income or GTI. On the other hand, Net Income is the total income after deducting all the allowable expenses and set off and carry forward of losses. So, we could say that gross income is the aggregate income, but when we make deductions out of it, then we call it net income or net taxable income.
Before diving into our topic, let us understand the meaning of Income.
What is Income?
Money or Money Equivalent which a firm or an individual earns during a financial year that adds to the value of currently held net assets is the income.
Content: Gross Income Vs Net Income
|Basis for Comparison||Gross Income||Net Income|
|Meaning||Gross income is the total amount of income, that an individual or a company generates during the financial year.||Net income is the remaining amount, which an individual or a company is left with after deducting all the expenses and taxes.|
|Represents||What amount do you make||What amount do you keep|
|Interdependency||Gross Income is not dependent on Net Income.||Net Income is dependent on Gross Income.|
What is Gross Income?
For a business enterprise – When the sales are more than the cost of goods sold, then the difference is called gross income or gross profit. This is to say, if the purchase cost of the products and expenses, connected to the purchase is subtracted from the sale proceeds of the product, the result that we get is the gross income. It shows the income generated out of the core activity constituting a part of the business.
For an Individual – The gross income of a person is used as a basis to ascertain the creditworthiness by the lenders and landlords.
In other words, from a taxation point of view, the sum of all the incomes, irrespective of the source from where it is derived by the person (including a company) except when excluded by law. Also, it covers income received in any form i.e. money, property etc. It includes the following:
- Fees for personal and professional services rendered
- Salary and wages
- Income from business
- Profit from sales
- Rental income
Further, it is not limited to the above-listed items, because many more sources can be a part of it.
For a firm engaged in manufacturing or mining business, the meaning of gross income is different. For them, it is the result of sales less the cost of goods sold (direct expenses related to purchasing or production), plus any income from investment and from outside operations.
Here, direct expenses include all those costs charged for producing and bringing goods into the present location and condition. It is the income without any adjustments and appropriations.
Also Read: Difference Between Gross, Operating and Net Profit
What is Net Income?
For a business enterprise – When office and administration expenses, selling and distribution expenses, taxes, interest and dividend is less than the gross profit, the resultant amount is the net income of the firm.
It is the monetary gain that the firm gets over a period of time, from operating activity, measured after deducting all expenses and expired costs incurred during the period. This income is attributable to the business owners, i.e. shareholders. It is the amount left after all adjustments (i.e. Provisions). In this, the non-operational income is also included in it, such as rental income, profit from the sale of assets.
Further, a positive figure indicates profit for the business. But if that figure is negative then it means that it’s a loss.
For an individual, net income is the ‘take-home money’.
From the taxation point of view – Net Income implies the gross income less allowable business expenses. This is to say, net income is the income that results after the deduction of all expenses from the gross income and set off and carry forward of losses. This income becomes taxable. Also, the income arising after deducting tax from net income is called after-tax income.
Also Read: Difference Between Gross Profit Margin and Net Profit Margin
Key Differences Between Gross Income and Net Income
The difference between gross income and net income are explained in the points below:
- Gross income is the total of all the receipts less expenses, which an individual or a company generates during the financial year. Conversely, Net Income is the balance amount. It remains with the company after deducting all the expenses and taxes.
- Gross Income includes all the amount that you make whereas Net Income includes all the amount that you keep.
- Gross income is always higher than the Net income. This is because the net income arrives after all adjustments and appropriations from Gross Income.
- While gross income does not depend on net income. Net Income is dependent upon gross income.
Suppose a shoe manufacturing company sells shoes worth Rs. 10,00,000 over the course of a quarter. And the amount spent on production and wages to workers is worth Rs. 7,50,000. So, the gross income of the firm for the quarter will be Rs. 2,50,000 i.e. 10,00,000 less 7,50,000.
Let us continue with our example, suppose the indirect expenses for the period is Rs. 1,80,000 and Sale of furniture is Rs. 20,000, Taxes paid Rs 5,000, Interest paid to debenture holders, Rs. 13,000, Dividend paid to Preference Shareholders Rs. 25,000. So, the net income will be 2,50,000 + 20,000 – (1,80,000 + 5,000 + 13,000 + 25000) = 47,000.
In a nutshell, Gross, as the name suggests is the entire amount that a firm receives from any activity, without giving effect to deductions like expenses. Gross income means the amount by which revenue of the company supersedes the cost of production.
On the other hand, ‘net’ means 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.
Very very useful site for learning difference of various things in a easy layman’s term