Gross & net income, revenue and profits are all terms that are often used in business and finance, but are confusing because they are sometimes used interchangeably. To make matters more confusing, they can also have different meanings depending on whether it is for an individual or business.
Here I’ll define these terms and also answer some common questions.
First let’s take a look at what the difference is between gross income and net income for an individual.
Gross Income (Gross Pay) – Individual
Gross income refers to an employee’s total wages. Gross income is the total amount of wages earned by an employee before taxes and other deductions are taken out.
For example, an employee making $40,000 per year with $10,000 withheld for income taxes, social security and Medicare taxes (FICA), health insurance, etc. would have had a gross salary or income for the tax year of $40,000.
Net Income (Net Salary) – Individual
Net income or net pay, refers to an employee’s take-home pay, which is the gross income minus withholdings like state and federal income taxes, FICA, insurance, retirement, etc.
Net income = Gross income – deductions
Using the same example from above, an employee making $40,000 per year, minus deductions totaling $10,000 would have net income or take-home pay of $30,000. ($40,000 – $10,000).
To sum up gross income vs net income, net income is simply the difference from what is taken out of the employee’s gross income.
Next let’s look at the difference between gross revenue, gross income and net income for a business.
Gross Revenue – Business
Gross revenue, also known as total revenue, is the total sales brought in by a business during an accounting period.
To illustrate this point, assume a restaurant has total sales of $100,000, has $30,000 in food costs (cost of goods sold or COGS), $35,000 in expenses like wages, advertising, utilities, rent, etc and $5,000 in tax liability. In this example, the restaurant had gross revenues of $100,000.
Gross Income (Gross Profit) – Business
Gross income for a business is a little different than gross income for an individual because unlike gross income for an individual which is the total amount of wages, gross income for a business is total revenues minus the cost of expenses used to generate those revenues. Gross income is the amount of revenue that can be used to cover operating expenses and taxes. Gross income and gross profit are terms that are often used interchangeably for businesses. The calculation for gross income / gross profit is the total amount of revenue or net sales generated by a business, minus the cost of goods sold or cost of inventory.
Gross income = total revenue – cost of goods sold
Using the example above, the restaurant had gross income of $70,000 after subtracting $30,000 in cost of goods from the total sales of $100,000.
Net Income – Business
Net income is all of a business’s revenues, minus all of the expenses like cost of goods sold, expenses and taxes, etc. Net income is the same as net profit. Net income factors in cost of goods sold and is the total amount of income or profit at the end of an accounting period.
Net income = Total revenues – cost of goods sold (also gross income) – expenses – taxes
Using the example above the formula for net income of the restaurant is $30,000. ($100,000 – $30,000 – $35,000 – $5,000).
To calculate the profit or loss for a business, check out this profit and loss calculator.
Profit margin is a popular ratio that is used to measure the profitability of a product or business as a percentage of revenue. Both of these ratios are very powerful in analyzing a company against an industry benchmark to see if the company is generating sufficient profit. Low profits typically indicate low pricing or too high of an inventory cost. There are two types of calculations for profit margin which is gross profit margin and net profit margin.
Gross Profit Margin is commonly called gross margin and is used to measures a specific product or a business. Measuring the gross profit margin of a product is important because low-margin products may not bring in enough income to make selling the product worth it for the company. Gross profit margin is calculated by taking the sales price of a product and subtracting Cost of Goods Sold. This number is then divided by the sales price. For example, if a product sells for $10 and it costs $4 to make, the difference is $6. Then to find the gross profit margin, divide $6 by the selling price which is $10, which gives an answer of .6 or 60%
Step 1 – Selling Price – Cost of Goods Sold = Gross Profit – $10-$4 = $6
Step 2 – Gross Profit /Selling Price = Gross Profit Margin = $6/$10 = .6. To find the percentage, multiply by 100 to get 60%
If evaluating an business, look at the income statement and find gross profit and divide by net sales to find gross margin.
Net Profit Margin is the percentage of profit left after all expenses have been subtracted from sales. The calculation takes net profits divided by net sales. For example, say a business brings in $100,000 per year in revenues and has net profit of $25,000. To find the net profit margin you would take $25,000 and divide by $100,000 which calculates to be .25 or 25% after multiplying by 100.
To help better illustrate the difference between gross & net income, below are some answers to common questions.
How do I calculate net income from a balance sheet?
A company’s net income can be found by determining the difference in retained earnings from two consecutive periods’ balance sheets and then subtract any dividends that were distributed.
How can I calculate a business’s net loss?
A net loss for a business is simply when a business has more expenses than revenues. To calculate a business’s net loss, subtract total revenues from total expenses.
What financial statement can net income be found?
Net income can be found on the income statement.
Where is net income found on an income statement?
On the income statement, net income is typically found at the end of the statement and is commonly referred to as the bottom line.
What reduces net income?
Net income can be reduced by an increased cost of goods, operating expenses or taxes.
Why is net income important?
Net income is important to a business because it shows if there is money left after paying for all expenses. Without net income, a business will become bankrupt without an infusion of additional capital. It is also a necessary figure to prepare a tax return for the business.