These well-known terms i.e. gross and net are mostly used in a financial environment and we all hear it at least every other week. These two are closely related, but in terms of value and figures, they are quite different. Whether you run a business or you are an employee, you need to understand the difference between gross amount and net amount of any value. Both these terms are easy to understand but have different meanings, depending on the context and situation, and that is why they are quiet often misunderstood and interchangeably used.
Gross versus Net; Explained:
The term gross describes the whole or total amount of something. It is the amount, which is not subjected to any type of deductions. It is the sum total of something.
Whereas net is the amount which you are left with after the necessary deductions have been made. The types and number of deductions that are made to the gross value to obtain the net amount depend on the purpose of the calculation. For example, net income before taxes will not have taxes deducted from it and net income after taxes will have taxes deducted.
Gross is the amount in its definitive purity in terms of quantity and value. Many thing are expressed in gross values in our daily lives and in businesses, e.g. gross weight, gross assets, gross income, gross profit, gross margins, gross sales, gross revenue, gross pay, gross estate etc. All these values are whole and complete in entirety. Gross weight of a package is the sum of the weight of the product inside plus the weight of the packaging. Gross sales is the amount in terms of money of all the goods sold without subtracting any costs and deductibles. Gross pay is the amount that the company is paying a person but not what that employee is actually receiving.
There is a net value for every kind of gross value, e.g. net weight, net assets, net income, net profit, net margin, net sales, net revenue, net pay, net estate and so on. All net values are calculated after adjusting the gross values with deductions. Net pay is the amount, which an employee actually receives, and not what he has earned from his employer. Because what the employer pays him is subject to a few deductions like taxes, 401K, health insurance etc. After all the mandatory deductions, what the employee actually receives is his net pay. Same goes with all other instances.
In terms of income, pay or revenue, gross is what you make (i.e. the total amount) and, net is what you keep (i.e. the remaining amount).
Understanding the Difference through Examples:
Let us further explain the two concepts through an examples comparison chart in the following;
|Pay||Gross Pay is the amount that an employee earns before the relevant taxes, insurance etc. are deducted.||Net Pay = Gross Pay minus all the relevant taxes, insurance, pension contributions etc.|
|Sales||Gross Sales is the total recorded value of the goods sold at sale price.||Net Sales = Gross Sales minus discounts allowed, returns by customers, refunds, provisions and allowances etc.|
|Profit||Gross Profit = Sales minus Total Direct Overhead Costs (Cost of Goods Sold)||Net Profit = Gross Profit minus all other operating and indirect costs.Net Profit is also called Net Earnings, Net Income, Actual Profit, etc.|
|Domestic Product||Gross Domestic Product (GDP) = It is the total market value of all the final goods and services produced within the geographical boundaries of a country, in one year period.||Net Domestic Product = GDP minus the Total Depreciation on a country’s Capital Assets in a given year. The smaller the gap between GDP and NDP, the better.|
|Profit Margin||Gross Profit Margin = It is the Gross Profit as percentage of Sales. It is obtained by dividing the gross profit by sales.||Net Profit Margin = It is the Net Profit as percentage of Sales. It is obtained by dividing the net profit by sales. It is an indicator of how good a business is at controlling costs and converting revenues into actual profits.|
|Dividend Per Share||Gross Dividend Per Share = It is the dividend amount before taxes etc. are deducted.||Net Dividend Per Share = It is the amount after the deductions of taxes etc.|
|Yield||Gross Yield = It is the return on investment before any expenses are deducted.||Net Yield = It is the ROI minus the costs of investment like commissions, interests, administrative fees and expenses, taxes etc.|
|Estate||Gross Estate = The total value of a person’s properties and assets prior to any allowances and deductions.||Net Estate = It is the value of a person’s estate after deducting maintenance expenses, administrative and management costs, taxes, bills and fees etc. Net Estate is what the heirs and beneficiaries receive.|
|Weight||Gross Weight = It is the sum total of the weight of the product plus the packaging.||Net Weight = It is the weight of the actual item inside the parcel only and not the packaging.|
Both these concepts have their relative importance for different purposes. We see these words used in Economic Data, Accounting Procedures, Investment Analysis, various Financial Environments, Businesses, Lease Agreements, Individual Earnings and in National and International Economies.