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What is Gross vs Net?
What’s important to know about them?
In this article, I will break down the difference between Gross and Net so you know all there is to know about them!
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Let me explain to you what Gross vs Net is and why they are important!
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What Is Gross vs Net
You may have heard the terms “gross” and “net” in business or at work and you wonder what they mean.
Gross refers to a number before any deductions are made.
For example, your gross income refers to your total income before any taxes or deductions are made.
Net refers to an amount after certain deductions are made to the gross figure.
For example, net income for a company refers to how much of their income is left over after they pay for all their expenses and taxes.
Keep reading as I will further break down the differences between gross and net.
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Differences Between Gross vs Net
Let’s look at the difference between gross and net in different situations.
The terms gross and net mean different things although they can be used to assess the same underlying concept.
Gross refers to the total amount of something resulting from a certain activity.
For example, gross income refers to the total amount of income a company may have generated.
Net refers to the amount that is left over after certain deductions are made to the gross figure.
For example, when you take a company’s gross income and deduct all expenses and taxes, you get their net income.
For a salaried person, the government will typically want to know someone’s gross income to be able to assess their overall tax liability.
A person’s gross income is the total amount of money they earned in a given year.
Taxpayers will then have the ability to make deductions from their gross income to get to their taxable income.
Companies on the other hand pay taxes on their net profits.
This means that companies will need to calculate their gross income and deduct their business expenses, amortization costs, and interest charges to get their net income.
In economics, the concept of gross and net is used to refer to different economic concepts.
For example, you have the concept of Gross Domestic Product representing how much the economy produced in goods and services in a given period.
You also have the Net Domestic Product which is a country’s total output less the depreciation in the country’s capital goods.
In accounting, the notions of gross and net are used very often.
The most notable use of gross and net income is to refer to gross income and net income.
You also have gross and net margins referring to a company’s margin before expenses and after expenses are taken into consideration.
Another use of gross and net in accounting is to look at profits.
Gross profits refers to how much a company has earned in profits before any expenses are taken into account.
Net profit refers to how much the company earns a profit once all expenses are considered.
In leasing, you have the notion of a gross lease and a net lease.
A gross lease refers to a type of lease where the tenant is required to pay rent along with all expenses related to the leased premises such as insurance, maintenance, utilities, water tax, and others.
You then have the notion of a net lease referring to a type of lease where the tenant will pay for specific expenses.
In a net lease, the tenant pays rent and property taxes.
In a net net lease, the tenant pays rent, property taxes, and insurance.
In a net net net lease, the tenant pays rent, property taxes, insurance, and maintenance.
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Gross vs Net Examples
Let’s look at a few examples of gross and net to better understand the concept.
Gross vs Net Income
Let’s consider a company generating the following income:
- $1,000,000 from operations
- $100,000 from investments
The company’s gross income is therefore $1,100,000 (total of all income sources).
The company has to pay $500,000 in operating expenses and $200,000 in taxes, for a total of $700,000.
The company’s net income is therefore $400,000 ($1,100,000 – $700,000).
Gross vs Net Pay
Let’s consider an employee that earns $4,000 in salary and $1,000 in commission in a given month.
The employee’s gross pay is $5,000.
However, the employer deducts $1,500 from the employee’s pay as withholding tax and to pay for group benefits.
The employee’s net pay is $3,500 which is the gross pay less the deductions.
Gross vs Net Revenue
Let’s consider a self-employed individual generates $50,000 in revenue in a year along with $15,000 in investment earnings.
The self-employed person’s gross revenue is $65,000.
However, the self-employed person must pay for different expenses allowing him or her to generate revenues costing a total of $25,000.
Therefore, the self-employed person’s net revenue is $40,000.
Gross vs Net Profit
A company will typically report its gross profit and net profit on its balance sheet.
Gross profit refers to a company’s ability to earn a profit by assessing its sales less the cost of goods sold and labor costs.
For example, a company will generate $1,000,000 in sales but must incur $600,000 in cost of goods sold and $100,000 in labor.
The company’s gross profit is $300,000.
On the other hand, the net profit refers to a company’s profitability for the entire business taking into account all aspects of the business operations.
A company may have generated $300,000 as gross profit but has earned a profit by selling some real estate properties.
The company’s net profit will not only include its profit from operations but also the profit from the sale of the real estate property.
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So there you have it folks!
What is the difference between gross and net?
In a nutshell, the term gross is generally used to refer to a total amount of something, such as revenues, square feet, profits, weight, or other metrics.
Net refers to how much is left over when you deduct certain amounts from the gross figure.
For instance, an employee may have a gross pay of $2,500 but a net pay of $2,000 after all payroll taxes are paid.
Understanding the difference between gross and net is important as they are used in many disciplines such as accounting, economics, leasing, taxation, and others.
Now that you know the differences between gross and net, good luck with your research!
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