The difference between gross and net is a simple one. In short, gross means all of something. In contrast, net means something once the relevant deductions have been made. As a result, while the difference between gross and net is a simple one, the results can be more complicated than that makes it seem. For proof, interested individuals should consider some practical examples of gross and net figures.
What Are Some Examples of the Differences Between Gross and Net Figures?
For example, consider the difference between a person’s gross income and a person’s net income. Generally speaking, a person’s gross income is their total income, meaning that the figure will include their wages, their salary, their capital gains, and so on and so forth. However, their net income is their taxable income, which is a figure that can be calculated by calculating their gross income and then subtracting the relevant allowances and deductions.
Furthermore, it can be worthwhile to look at some of the gross and net figures that see use in the field of accounting, which in turn, means that they pop up in the context of business elsewhere as well. For instance, consider the example of gross sales and net sales. Generally speaking, a business’s gross sales is the amount of money that it is bringing in in a particular period of time by selling its products and services to its customers. For example, if a business sells 100 units of a product that is worth $2,000 per unit in a single month, that means it has $200,000 in gross sales in that particular month. Meanwhile, net sales would be the figure once the returns, the allowances, and the discounts have been factored in as well. For example, if that same business had offered a discount of $200 on its products, that means that it would have had to deduct $20,000 from its gross sales to come up with a net sales of $180,000. Likewise, if one of its units had to be returned as well, its net sales would be even lower by an appropriate amount.
With that said, it is important to note that neither the gross sales nor the net sales is better or worse than the other. This is because each figure is used for different purposes. For instance, the gross sales is useful as an indication of how fast a business is generating its sales, particularly when its revenue-earning operations are compared to the revenue-earning operations of its competitors. In contrast, the net sales is useful for gauging how much money the business is actually bringing in through its sales, which is also very useful but in very different ways.
Something similar can be seen in the difference between gross income and net income when these figures are calculated for businesses. In short, gross income for a business is defined as its net sales minus the cost of good sold, which is the sum of the expenses incurred in the process of getting a hold of the products that were sold off. Sometimes, this can mean nothing but purchase costs, but in other times, this can encompass manufacturing as well as other kinds of costs. Meanwhile, net income is defined as gross income minus administrative expenses, taxes, interest, and other expenses that do not fall under cost of goods sold, which is why there can be a significant gap between gross income and net income when presented on an income statement. Once again, both figures can be useful under particular circumstances, particularly when helping interested individuals understand whether a business is profitable or not as well as why that happens to be the case.
Summing it all up
Summed up, it is clear that even though the difference between gross and net is very clear, that difference can express itself in a wide range of ways. As a result, if someone isn’t sure of the situation because they are unfamiliar with the exact gross and net figures that are being used, they should look into them instead of making assumptions. After all, different pairs of gross and net can be very different, meaning that making too many assumptions can be pretty foolish, particularly if there are serious stakes that are reliant on interested individuals understanding what they are seeing.