The difference between gross and net income

The difference between gross income and net income is highly dependent whether you are talking about a business standpoint or an individual person’s standpoint.

The following summarizes the meaning of gross income and net income among these two:

Individual

Gross Income – Salary/Wage received from an employer before deductions are accounted for

Net Income – Salary/Wage received from an employer after deductions are accounted for (e.g. taxes & contributions)

Business

Gross Income – Net Sales less cost of providing the service (service business) or cost of inventory sold (merchandising & manufacturing business)

Net Income – Gross income less other operating & non-operating expenses (e.g. marketing expense, & interest on loans, respectively)

Example

Individual

An employee named Bob received his month-end pay. His gross pay was $2,000 with $500 deductions from contributions and taxes. In this example, Bob’s gross income is $2,000 while his net income is $1,500 ($2,000 less $500).

Business

ABC Co. has the following totals at the end of the year 20×0.

Using the preceding data, ABC Co.’s gross income will be $1,800,000 (Net Sales of $3,000,000 less Cost of Sales of $1,200,000).

To come up with the net income, you must deduct all the other expenses from the gross income. Take note that whether the expense is operating (e.g. marketing & administrative) or non-operating (e.g. interest on a loan), you must still deduct it from the gross income in order to arrive at the net income.

In this example, the gross income is $1,800,000. We will deduct $800,000 in operating expenses ($500,000 marketing plus $300,000 administrative) and $5,000 non-operating expense to come up with $995,000 net income.

Using the preceding information, you can now construct a basic income statement of ABC Co.

ABC Co.
Income Statement
For the Year Ended 20×0

Keywords:

gross income vs net income

gross income vs. net income

gross vs net income

gross vs. net income

Leave a Reply

Your email address will not be published. Required fields are marked *