If you are an entrepreneur and an employee in the company, then you need to understand a lot of business terms and figures like gross income vs net income, with some you are familiar with and with some you are not. These figures and terms are helpful to understand tax forms, profits of the organization, and the salary. Like these figures we are going to discuss in this blog, that is gross income and the net income. Both are very much similar to each other but there are a few differences in them. Both are having their own side of the story to tell. So let us begin….
What Is Gross Income?
Gross income is that amount that you have earned over a period of time. It is only the profit you earned after misusing the selling and producing cost of the good. The gross income provides information on how efficient is your company and how your company manages the production cost and able to produce a profit from the sale of the goods and the services. the gross income of the company is calculated by deducting the selling cost of the good from the total revenue of the company.
Revenue is the total amount of money a company earned from sales for a particular period of time. depends on the company revenue costly reviewing policy. Sometimes Revenue is equal to net sales. Sometimes in revenue, we include discounts and deductions from expired goods or damaged goods from retailers.
Cost of Goods Sold (COGS)
The cost of goods sold is the direct costs involved in producing goods. COGS typically includes the following:
- Direct materials cost
- Direct labor cost
- Equipment cost
- Repairing cost
- Uses of production facilities
- Shipping costs
Formula to Calculate Gross Income
Gross income is also known as gross profits. Gross income is the company’s profit before expenses are deducted.
Gross Profit= Net Sales – COGS
What is Net Income?
The net income is the actual money that is earned by you as a profit of the company. The net income is that money you are left with after everything deducted. If it is still a profit, it’s net income. If the result of that is a negative amount, then your net income is a loss. Net income is always at the bottom of the statement because it shows whether you are in profit and in the loss. It depends on your efficiency and your hard work. There are many items listed in the company income statement depend on the type of the company. Usually, net income is calculated by detecting the following expenses from the revenue:
- Operating expenses
- Interest on debt and bank loans
- General and administrative expense
- Income taxes
- Depreciation expenses
- Formula to Calculate Net income
Net Income = Total Revenue — Total Expenses
Gross Income VS Net Income
Gross income uses the company’s goodwill to earn a profit while at the same time manages its production and labor costs. It is an important factor which we have to consider why a company’s profits are increasing or decreasing by sales, production costs, labor costs, and productivity. If a company reports an increase in revenue, but it’s more than offset by an increase in production costs, such as labor, the gross profit will be lower for that period.
Net income represents the profit from all the factors of a company’s business operations. As a result, net income is more important than gross profit and can provide insight into the management team’s effectiveness.
Gross Income vs. Net Income FAQs
- What Is Net Income?
Net income represents the overall profitability of a company after deducting all expenses and costs from the total revenue. Net income also includes any other types of income that will be earned by the company at the specified period of time, such as interest from investments or income received from the sale of an asset.
- What Is Gross Income?
Gross income or gross profit represents the revenue left after the costs of production have been subtracted from revenue. Gross income provides insight as to how effective a company is at generating profit from its production process and sales initiatives.
- How Do I Calculate Net Income From Gross?
Net income is gross profit minus all other expenses and costs as well as any other income and revenue sources that are not included in gross income. Some of the costs subtracted from gross to arrive at net income include interest on debt, taxes, and operating expenses or overhead costs.
- Is Net Income the Same as Profit?
Typically, net income is synonymous with profit since it represents the final measure of profitability for a company. Net income is also referred to as net profit since it represents the net amount of profit remaining after all expenses and costs are subtracted from revenue.
- What Is an Example of Net Income?
Let’s say a company generated $1 million in revenue and had the following costs and other income:
- Cost of goods sold of $600,000
- Operating expenses of $200,000
- Debt payments of $10,000
- Tax payments of $5,000
- Interest income of $8,000
Net income would equal $193,000 ($1,000,000 – $600,000 – $200,000 – $10,000 – $5,000 + $8,000).