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Gross Income vs Net Income

Updated on January 3, 2024
Article bySayantan Mukhopadhyay
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Gross Income and Net Income

The key difference between gross income and net income is that gross income refers to the income which is left over to the company after deducting the cost of the goods sold from the revenue earned by the company, whereas, Net income refers to the amount left as the earning in the organization after deducting all the expenses in the organization including other expenses such as dividends, etc. from the gross income.

If you’re a new investor or just trying financial accountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.read more, you must know the difference between gross and net income.

In simple terms, we can calculate gross incomeCalculate Gross IncomeGross income is calculated as total income earned before any deductions and taxes. Thus, it includes income from all sources, including rent, dividends, interest. In contrast, for business, it is estimated as the revenue earned from goods and services minus the cost of goods sold.read more by deducting the cost of goods sold from net sales. At the same time, we can compute net income by deducting all operational, general, and administrative expenses (plus adding different sources of income).

Gross Income vs Net Income

To understand the difference between them, we need to look at a company’s income statement.

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Gross vs. Net Income Video Explanation

Gross Income vs Net Income Infographics

Gross Income vs Net Income

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Key Differences

Gross vs. Net Income Comparative Table

Basis for comparisonGross IncomeNet Income
MeaningThis is the immediate income a company makes by deducting the cost of goods sold from the net sales.This is the culmination of both incomes from operations & income from other sources.
ComputationIt can be calculated by deducting the cost of goods sold from the net sales (net sales = gross sales – sales return/discount) It can be calculated by deducting the operational expenses, interest expensesInterest ExpensesInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more, taxes from gross income, and adding any income from other sources to the same.
Why is it important?Gross Income is important because it helps us understand how much a company earns after removing the cost of goods sold from the sales. It doesn’t deduct any other expensesExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more or adds any other income.It is important because it gives us a big picture of what exactly a firm can use for reinvestment or payment of dividend to the shareholdersDividend To The ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more.
DependencyGross Income isn’t dependent on the net income.Net Income is dependent on gross income. Until you know the gross income, you can’t compute the net income of a company.
Amount It is always more than the net income.It is always less than gross income.
Expenses deductedCost of goods soldOperational cost, non-operational cost;

Conclusion

While we find out the difference between them, what’s most important is understanding the big picture of a company.

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This article is a guide to Gross Income vs. Net Income. Here we discuss their top differences, infographics, and comparative tables. You may also have a look at the following accountings articles for gaining further knowledge –