Net Income Vs Gross Income: Difference Between Gross And Net Income

Net Income Vs Gross Income: Difference Between Gross And Net Income

Gross vs Net Income: What is the difference between gross profit and net profit?

Gross income or profit is the total amount of money you earn and net income is your real business profit after expenses and allowable deductions are removed. However, since we use gross income to calculate net income, these terms are easy to confuse. When you manage your own business, understanding the difference between gross income and net income is important both to check your personal finance as well as to measure your business performance. These numbers can also play an important role on your tax remittance to the government.

What is gross income?

Gross income or gross profit is the total amount you earn (usually in a period of one year) before deducting expenses. Think of it as the profit made from the services you rendered or the product you sold—the total billings to clients before any deductions, taxes, or withholding.

How do I calculate gross income?

To calculate your yearly gross income, add up your total revenue for the year. For example, if your client billings add up to $90,000 in revenue, then that amount is your yearly gross income or total gross wages. We calculate gross profit on the trading accounting section of the final account of a sole trader.

Why is gross income important?

Gross income is a helpful way to look at the revenue potential of your business and to assess your performance year over year. By checking your different revenue streams, you can see which clients and which types of projects earn the most and least income. This insight may influence where you choose to direct most of your time and effort, or find the future goals you set for your business.

What is net income?

I call net income "REAL INCOME". Net income is the profit your business earns after expenses and allowable deductions. We calculate net income on the profit or loss segment of the final account if a sole trader. 

How do i calculate net income?

To calculate net income, subtract all your business expenses from your gross income. Business expenses include; marketing or advertising costs, travel or office expenses, tax payments, etc.—as well as any deductions you are eligible for, such as a home office space, retirement plan, or legal and professional fees. Below we calculated an example of a typical business expenses to decide net income.  

After you find your expenses, you can calculate your net income vs gross income. Using the above expenses, here is the calculation that determines your gross income as £90,000 less your expenses of £30,000, making your net income £60,000.

Why is net income important?

Net income can help you understand the health of your business. For instance, if your gross income is much greater than your net income year after year, you may want to thoroughly check your expenses to see which expenses you can cut.

Why it is important to understand the difference between gross profit and net profit

Knowing the difference between gross income and net income is an important part of managing your finances on a personal level and managing a successful business if you are a small business owner or self-employed. It can also help you make important decisions about income choices, such as when to raise your rates, whether or not certain expenses are necessary, and the types of income, projects and clients that you should focus on.

Gross vs net income can show different views and affect your personal goals and actions or your goals and actions as a business owner. As a business, gross income shows the revenue generated yearly and give a view on how your business performed. However, net income gives you a slightly different view – it reveals how much you are making after expenses. You should consider cutting some expenses if your net income is lower than expected.

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