Business Education

Difference between Gross and Net

Main Difference

Understanding the differences between gross and net for business and economics purposes is important either it is about sales, salary, or profit. There are many differences between gross and net. The main difference between gross and net from business point of view is that gross means total amount gained as a result of some activity without further deductions of expense or allowances while net is the amount that is left behind after deducting all kind of expense and allowances.

Gross

grossGross refers to the amount received from all sources and is not limited to cash received. The amount of income recognized is generally the value received or which the taxpayer has a right to receive. In business, the gross income or profit that is earned by business from sales after deducting the cost of goods sold. If the term gross is taken for weightage purpose then it means the weight of the product along with packaging.

Net

netIn business, the net refers to the amount that is left behind after deducting all kinds of selling, distribution & administrative expenses, taxes, interests, allowances, etc. from the revenue or total sales. It is the next step to gross as gross is restricted to the deduction of cost of goods sold from the sale figure only. Net income or net profit is a basic tool to analyze the overall financial health of an organization. If the term net is taken for weightage purpose then it means the weight of a product without packaging.

Key Differences

  • Salaried persons usually pay income tax on their gross income. Business and self-employed or non-salaried persons pay tax on their net income.
  • Gross income is calculated by deducting the cost of goods sold from the total sales. Net income is arrived at by deducting the expense relating to administration, general, selling, and other interest and taxes from the gross income.
  • In packaging and weighting, gross means the weight of product along with packaging or container in which product is enclosed. Net mean the weight of actual product without actual packaging.
  • Gross income is more related to the operation of business as unnecessary losses and expenses are not deducted while net income is not much related to operation of business as unnecessary losses, expenses and allowances are permit to get deduct.
  • Net income is a primary indicator to measure and analyze the overall financial health of an enterprise.
  • It is net that calculates the amount of expenses while gross is restricted to cost of goods sold only.
  • In margin, gross margin is the ratio of gross profit to revenue while net margin is the ratio of net profit to revenue.

Video Explanation

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