Gross income and net income are two terms that you will hear all of the time in business settings. Knowing the difference between gross and net income will help you to understand how profitable your business is and how your expenses are affecting your bottom line.
What is Gross Income?
Gross income is the sum of all of your business sales over a defined period. "Gross" indicates an unaffected number that is only concerned with the total revenue that your business has earned.
How to Calculate Gross Income:
You can calculate gross income by adding up all of your sales over a period of time. These numbers may be recorded on invoices, or through a POS system if you operate a retail space.
What is Net Income?
Net income is a reflection of how much profit you actually made after all of your business expenses were paid. Gross and net income can be calculated for the same period of time (month, year, etc.) to show profitability.
How to Calculate Net Income:
To calculate your net income, take your gross income from a certain period of time and then subtract your total expenses from that same period of time. The result is your net income.
Final Thoughts: Why the Difference Matters
A quick glance at your sales numbers may cause you to believe that your business has achieved a large profit margin, but it is easy to forget that there is always a cost to doing business. By calculating both your gross and your net income, you will get a better understanding of what it costs you to do business and how much profit you are actually generating.
All aspects of business finance and accounting are important for small business owners, but the basic concepts of net and gross income are quite possibly the most important fundamentals for you to understand.
What is the difference between gross and net income?
Why is it important to know the difference between gross and net income?
All aspects of business finance are important for small business owners, but the basic concepts of net and gross income are quite possibly the most important fundamentals. By calculating both gross and net income, small business owners will reach a better understanding of what it costs to do business and how much profit is being generated.