If you are new to financial accounting, net income and gross income are two terms that you must understand. Both of them are crucial in presenting the profitability of a business. As a business owner, you need to know the correct ways of calculating them so that you get to analyse the exact financial position of your company. If the accounting tasks are too time-consuming and you cannot afford to hire an in-house full-time accountant (Also see How Do the Accountants Reconcile the Accounts?), why don’t consider engaging an accounting firm in Singapore? The professionals will be able to keep your books of account always updated and ensures the accuracy of your accounting (Also see Do You Know What Are Accounting Controls?) records without costing you much.
Firstly, let us look at what do net income and gross income mean. Net income is the sum of money remaining after the deduction of all the expenses incurred in the company from the gross income. This portion is the amount of the company’s earnings. On the contrary, gross income is the income (Also see Importance of Statement of Comprehensive Income) of the business after the company subtracts the cost of goods sold from the revenue generated.
In other words, if we want to calculate net income, we need to deduct all the operations, administration and management expenses from the gross income generated. If we’re going to calculate gross income, we should deduct the cost of goods sold from the company’s net sales. Thus, from here, we get to know that the amount of gross income will always be higher than that of the net income.
When you look at the profit and loss statement of your company, the first item that appears on it is the gross sales. To calculate gross sales, you need to multiply the number of products sold with the price per unit of the products. Then, if there is any sales returns or sales discount and you subtract them from the gross sales, you will get the net sales.
After calculating the net sales, you should subtract the cost of goods sold from it, and this will result in the gross income. We will be able to tell the amount close to the exact sum of money the company has earned by looking at this sum. Next, to calculate the operating income (Also see What Can You Find in an Income Statement?) of your business, you need to subtract all operating expenses incurred from the gross income. Deducting the taxes and interest expenses from the operating income will result in the net income.
Net income plays a crucial role in telling the financial position of a business as it shows the amount of money the company has for it to pay a dividend to its shareholders or to reinvest those sums back into the business. On the other hand, we get to know the amount of money a company has earned after deducting the cost of goods sold from its net sales by looking at its gross income. Thus, both net income and gross income of a business are vital if one intends to understand the financial performance of the company.