What is Gross vs Net?
Gross means the total or whole amount of something, whereas net means what remains from the whole after certain deductions are made. For example, a company with revenues of $10 million and expenses of $8 million reports a gross income of $10 million (the whole) and net income of $2 million (the part that remains after deductions). This guide will compare gross vs. net in a business context.
Examples of Gross Items
In finance and accounting, there are many items in the financial statements that are referred to as gross.
- Gross Assets – The value of assets before any deductions
- Gross Revenue – All revenue before any items are netted out (e.g., refunds and returns)
- Gross Profit – Profit margin after only deducting cost of sales or cost of goods sold
- Gross Margin – Gross profit divided by revenue, showing gross profit as a percentage
Examples of Net Items
There are also many instances of net items that appear in financial statements.
- Net Assets – The value of assets after certain liabilities are deducted
- Net Revenue – Revenue after refunds, returns, or other items are deducted
- Net Earnings – The bottom line that remains after deducting all expenses from revenues
- Net Income – Same as net earnings
- Net Margin – Net income divided by revenue, showing net income as a percentage of
Gross vs Net Calculator
Let’s work through two examples that were listed above and calculate the various gross vs net amounts.
Assets: A company owns land worth $5 million, a building worth $2 million, and has a $4 million mortgage. The gross asset value is $7 million ($5 million + $2 million) and the net asset value is $3 million ($5 million + $2 million – $4 million).
Income: The same company reports rental income of $1 million per year, interest payments of $200,000, salaries of $250,000, and taxes of $100,000. The gross income is $1 million. The net income is $450,000 ($1 million – $200,000 – $250,000 – $100,000).
Download CFI’s Excel calculator to input your own numbers and calculate different values on your own. As you’ll see in the file, you can easily change the numbers or add/remove rows to change the items that are included in the calculation.
Gross vs Net in Conversations
The terms gross and net are used frequently in accounting and finance conversations. The easiest way to know what someone means is to think about what could naturally be deducted from something.
For example, if someone says, “Our company made $30 million last year in our online division.”, you may want to ask them, “Gross or net?”. If they say gross, they probably mean either revenue or gross profit (you may need to ask for further clarification). If they say net, you may assume it’s net income (after all expenses are deducted), but you may still need to ask for clarification, as they could be thinking only of operational expenses (which excludes interest and taxes), or they might be including all items.
Unfortunately, as you can see in the example above, it is sometimes ambiguous what someone means when they say “gross” or “net”, so further clarification may be required. The only way to know for sure what someone means is to ask them exactly what is included and/or what is deducted from the figure.
Thank you for reading this guide to understanding what gross vs net means in a business financial context.
CFI is the official provider of the Financial Modeling & Valuation Analyst (FMVA)® designation, created to help transform anyone into a world-class financial analyst. To continue learning and advancing your career, these additional CFI resources will be useful: