Income is the main indicator for assessing the economic activity of an entrepreneur (individual or legal entity). Making a profit is the goal of any business. Though gross and net both can describe income, they mean two completely different things. In today’s article, we will describe both and do a gross vs net income comparison to help to see the difference between the two. Moreover, you will also learn how these terms are applied in different situations and how that can change their meaning.
If we consider the gross income term used in a business setting, then it will represent the company’s income less the cost of goods sold. To calculate gross income only costs directly related to producing the company’s goods are deducted. This involves:
- Raw materials
- Equipment and machinery used to make a product or provide service
- Packaging and shipping
- Direct labor costs.
Our gross vs net income comparison would not be complete if we did not talk about gross income meaning for individuals. This term is something one would usually see on their paycheck and might be referred to as gross pay. It will represent the amount of salary or wage a person received before taxes and other voluntary or required deductions have been subtracted from it.
Gross income is used by businesses to calculate many other financial indicators to evaluate a company’s financial health. Lenders, landlords, and other entities use an individual’s gross income to decide whether they should lend them money or provide rent.
In addition to the cost of goods sold, a company would deduct total expenses from the income to receive the amount of its net income. This would typically include:
- Operational and office expenses
- Marketing and advertising
- Travel expenses
- Employee benefits.
If you compare the gross vs net income on one’s paycheck, the second one will be at least somewhat less. This is because, just like with a business, an employee has to pay taxes and other deductions might be made. An easy way to remember this is that net income (pay) is the amount of money that the individual takes home. This will be the amount an employee receives when they cash or deposit the paycheck.
Net income allows business owners and outside entities, such as investors, to evaluate how a company’s revenue can cover its expenses. For an individual, one can know how much money earned they will actually be able to spend.
When comparing gross vs net income, we can come to the conclusion that gross income is the amount an individual or business makes before deductions are added in. Net income, on the other hand, is the amount an individual or business makes after costs and deductions are factored in. In other words, the gross describes the total amount and the net describes the remaining amount.
We can further compare gross vs net income based on whether we are referring to a business or individual income. The gross income for a person is the total money a person earns before taxes, while in business, gross income is the amount a company makes minus direct expenses (e.g. operating costs). Net income (pay) for an individual is the take-home income a person earns after taxes. In business, net income is the actual profit generated once all expenses, including overhead costs, are added in.