What is the difference between Gross and Net Income?

What is the difference between Gross and Net Income? Both figures appear on the profit and loss account. Below we look at the breakdown of the profit and loss account or income statement and explain each section.

What is Turnover?

Turnover is the gross income of the business. It can include income from products and services it sells. An example is a computer company sells and repairs computers. Included in turnover will be the sales for hardware, software, consumables, time and anything else which is a sale.

What is the difference between Gross and Net Income?

Below we look at the definitions of both the Gross and Net Income.

What is Gross Income?

Gross income or net sales is the turnover, less cost of sales of the company. An example is a business has a turnover of 300,000 and costs with producing the products of 50,000. The Gross Income would, therefore, be 250,000.

Cost of sales can include purchases, rent in connection with manufacturing, salaries and other direct costs.

What is Net Income?

While net income is the sales less cost of sales and all the business expenses and therefore, the profit of the business.

The difference between gross and net income is also important for an employee looking at their payslip. Each employee earns a gross wage, but there are deductions to be made for tax, NI, Student loans and pensions. The figure that the employee receives is the net income.

It is important to look at both of these figures as a business may have a very high turnover and think it is performing well. When calculating the net income, and it includes the expenses, it may produce a very different picture. An example of this is a business that has a Gross Profit of 250,000 and thinks it is doing well. When looking at the profit and loss account, there are expenses of 260,000, so the business has made a loss.

Below is an example Income Statement:

Profit and Loss account of ABC Computers for the period 1st April – 31st March
Cost of Sales50,000
Gross Profit250,000
Office Expenses25,000
Total Overheads260,000
Net Profit-10,000

In the example, the business would need to look at the figures and see if they can make any savings. They would also need to compare this profit and loss to the previous one to see where differences are. It might be that turnover has dropped, while other expenses have stayed the same.

Return from what is the difference between Gross and Net Profit to Profit and Loss Statement.

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