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Gross vs Net Income | Know the Top Differences! % %


GROSS VS NET INCOME

If you see in simple terms we can calculate the gross income by deducting the cost of goods sold which is known as your COGS from the net sale said some things it is something like this net sales less COGS that is your cost of goods sold right. And we can compute the net income by deducting all the types of operational we have general and admin expenses and plus adding different sources of income. gross vs net income

So to understand the difference between the gross income and the net income we need to look at the income statement of the company now in the income statement the first item is basically the gross sales. The gross sales are the product other are basically the product of the price per unit of the products sold and the quantity of the products sold. So from the gross sale we deduct the thing called less sales discount.

We also need to deduct from here any sort of sales return right and after deducting both of this thing and we get the net sales right that's the final call now from the net sales we deduct cogs and here we get the figure of the gross income or the gross profit.

gross vs net income

So the gross profit is an important measure because you know the gross profit GP basically tells us a figure that's very closer to the profit from operations right. Now if we deduct the operating expenses from the gross income that is you had let's say you have your gross income and you deduct from that less your operating expense.

Well when you deduct that you get your operating income which is also known as very famous term EBIT earnings before interest in taxes. So now from this EBIT we deduct the interest portion interest expenses and we also deduct taxes to arrive at the net income. So you can see how the whole process has vanished. Net Income is basically you know the elimination of the profits from the operations and you know profit from other sources like for few businesses there is other sources of income as well as you know other than the income from the operations.

Now what we'll do we'll understand the difference between the gross income and the net income with the help below figure.

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#1. MEANING OF GROSS VS NET INCOME

Gross vs Net Income

Let's try and understand we'll start with the meaning first as you can see the gross income. The gross income is the immediate income company makes by deducting the cost of goods sold from the net sales. So from the net sales when you deduct the COGS you get your gross income and net income is the culmination of both income from operations that is EBIT part and income from other sources like income from your discontinued operation or from the sale of the asset and so on and so forth so other non-operating income also will be part of our net income.

#2. COMPUTATION OF GROSS VS NET INCOME

Gross vs Net Income

The second is the computation part now if you see for the gross income. Gross income can be calculated by deducting the COGS that is the cost of goods sold from the net sales. So net sales is equal to gross sales minus sales returns and discount and if we talk about net income. Net income is basically calculated by deducting operating expenses, interest expense, taxes from gross income and then by adding any income from other sources. I have already explained you through with the help of an excel how exactly it is computed but the only thing that was supposed to get added over there was the other sources to the other income that was supposed to be added.

#3. WHY IT IS IMPORTANT?

Gross vs Net Income

Why exactly it is important if you see for the gross income and net income. Gross income is important because it helps us to understand how much company earns after removing the cost of goods sold from sales right. You deduct the cost of goods sold that is the purchasing part from your sales and it does not deduct any other expenses or add any other incomes but if you see for the net income.

Net income is important because it gives us a bigger picture this gives you a smaller picture you don't have all the details you know you have all the details here. You don't have here and you have it here and it is exactly a firm uses for reinvestment or payment of the evident to the shareholders because after the net income whatever remains you know that's that goes to the shareholder and if the company is declaring dividend and then probably those percentage of dividends will be given to the shareholders depending upon the decision of the board of director.

#4. DEPENDENCY OF GROSS VS NET INCOME

Gross vs Net Income

Know the dependency gross income is dependent on the net income isn't it quite logical the net income is dependent on the gross income until you know the gross income. So if we have gross income then and only will be having net income right but here we need gross income and arrive at the stage of net income. So until you know the gross income you cannot compute the net income of the company.

#5. AMOUNT OF GROSS VS NET INCOME

Gross vs Net Income

The fourth is the amount gross income is always more than the net income because after gross income there will be some deductions which will reduce the net income and net income has to be always less than gross income this both are quite logical and conceptual plus that is more of for common sense.

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#6. EXPENSES DEDUCTED

Gross vs Net Income

What are the expenses that have been deducted cost of goods sold as we have discussed about and all the operational and non-operational cost are deducted to arrive at your net income right.


NOW SOME OF THE MAIN DIFFERENCES

The main differences between GP that is the gross income versus the net income in a very quick through manner the main difference between the gross income and net income is the scope part the gross income only considers the sales.

The cost of COGS is cost of goods sold on the other hand the net income deals with the operational and the non ops expenses an income. Second it is to find out the gross income and profit and we need to deduct the COGS from the sales to find out the net income profit we need to call as deduct operational expenses, interest expense, taxes and the gross income and add income from the other sources.

gross vs net income

Third gross income helps us to find out the net income. So there's dependency a net income on the other hand you know is completely depend on the gross income. Forth now to understand gross income and net income one must know the income statement thoroughly gross income is the fourth item on the income statement after gross sales, sales return, discount and cost of goods sold in net income is the last you can say the last item on the income statement in few cases after net income the company calculates the EPS well after discussion of all of this let me conclude in a very quick manner we have found that the difference between the gross income and net income.

What's most important is understanding a bigger picture of the company a gross income and net income they are both the part of the whole income statement but if you want to invest in a company or want to comprehend the financial health of a company you need to learn to see every minute details and consider every expense that has been incurred and using the gross income we can calculate the ratio called as gross income and the gross profit margin where we divide the gross income by the total sales.

On the other hand you know using net income we can calculate a ratio that is called as income or net profit margin where we divide the net income by the total sales.

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