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What Is Gross Income?
Gross income (applied to companies) is the income that a company earns from the sale of their products and services after subtracting the direct costs associated with producing those goods from the gross revenues generated by them.
The formula for calculating gross income is:
Gross Income = Gross Revenue - Cost of Goods Sold
Gross income is also referred to as gross profit and is reported on a company’s income statement.
Takeaway: Gross income and net income are found on a company's income statement. An income statement is a financial document that can be read in concert with a company's other disclosure documents -- their balance sheet and cash flow statement.
What Is Net Income?
Net income is the amount of profit a company makes after taxes, operational expenses, wages, and all other expenses are deducted. It’s easy to calculate by simply taking gross income and subtracting all of a company’s other expenses.
Net income is useful for calculating a company’s earnings per share, a metric which indicates how much profit a company makes annually per share outstanding. To calculate it, simply take a company’s net profit and divide it by the number of shares currently outstanding.
Gross And Net Income Example
Here’s an example of how to calculate gross and net income:
1. In 2021, Acme Tech reported $2 billion in total revenue from advertising and services. That revenue cost $500 million in direct costs to generate.
2. To calculate gross income, simply subtract the company’s direct cost of goods and services from their total revenue using this formula:
Gross Income = Total Revenue – Cost of Goods and Services
= $2 billion - $500 million
= $1.5 billion
3. To calculate net income, add up all of a business’ operating expenses, taxes, wages, and other costs to their direct cost of goods and services. For Acme Tech, their total expenses amounted to $1.5 billion during 2021.
4. To calculate net income, simply subtract the company’s total revenue from their total expenses.
Net Income = Total Revenue – Total Expenses
= $2 billion - $1.5 billion
= $500 million
Gross Vs. Net Income: The Difference
What is gross income vs. net income? Gross income and net income indicate different things related to a company’s performance.
Gross income measures how much a company makes on the sale of their products and services after deducting the cost of producing those products and services. This indicates how profitable products are relative to the costs of materials, labor, storage and other costs of producing them.
Investors can look to a company’s gross income and profit margins from previous years or in other industries to see whether a company’s profit margins are increasing or decreasing over time and how competitive it is relative to its peers. If a company’s gross income or profit margin is increasing, an investor can deduce that a company is performing well at pricing its products and controlling its production costs.
If a company’s gross income or profit margin are decreasing then that could indicate that the company’s products are costing more to produce or that they are selling for less, which might indicate future potential problems with sales or growth.
Net income measures how much a company makes after all expenses are figured in. That includes relatively fixed or long-term expenses like administrative wages, lease payments, taxes, and debt payments. Companies can calculate their net profit margin by calculating how much net revenue they bring in relative to their total expenses. This figure will show how profitable the business is as a whole across all product lines.
A company can have a high gross income and profit margin but a low or negative net income and profit margin, suggesting that while their products may be profitable, there is insufficient quantities of that product being sold to support their overhead and administrative costs. Investors can also compare a company’s net income and net profit margin to its figures in previous years to understand how the company’s performance is changing over time and whether it’s improving or not.
Tip: The terms gross income and net income are also used by individuals when calculating their taxes. When it comes to an individual's earnings, gross income is the total income someone is paid by their employer whereas net income is the income someone receives after things like taxes, office supplies, professional fees, and other deductions are subtracted from it.
Bottom Line
Gross income and net income are financial metrics that can be helpful for companies and investors to understand the performance of companies. Both numbers can be used to calculate popular ratio metrics to better understand a company’s financials in order to make informed choices about investing in a company or running it.
