Gross vs Net

Gross Salary versus Net Salary.
Gross Revenue versus Net Revenue.
Gross Profit versus Net Profit.
You can think of the gross amounts as “Before”, and the net amounts as “After”.
Let’s discuss what is between gross and net in each of these cases.

⏱️TIMESTAMPS⏱️
00:00 Introduction to gross versus net
00:18 Gross Salary versus Net Salary
01:23 Gross Revenue versus Net Revenue
02:36 Gross Profit versus Net Profit

First example, from the world of payroll accounting. Gross Salary: the amount advertised in the job posting, usually on an annual basis. “A $75,000 job” refers to a job that offers 75 thousand dollars in gross annual salary.
Net Salary: the “take home pay”, usually on a monthly basis. 75 thousand dollars in gross annual salary roughly translates to a monthly net salary of $4,778. Big disclaimer: don’t take that as a given, please do your own research for the country and state that you live in, as these amounts can vary very significantly!
What types of deductions are made, to go from #gross to #net salary? Here are the main elements, without trying to provide an exhaustive list: federal income tax, state income tax, social security tax, medical leave and family leave insurance, and others.

Second example, from the world of corporate financial statements: Gross Revenue versus Net Revenue.
Gross Revenue is how much a company has (initially) invoiced to its customers for delivering goods or performing services. Net Revenue is how much of that invoiced amount actually ends up in the income statement. Let’s put some numbers to that.
If Gross Revenue for a company is 104, then we generally need to deduct three different line items in order to get to Net Revenue:
Returns: The value of items that customers send back to the business, let’s assume the value for this is 2.
Allowances: Price reductions given to customers, often due to issues like damaged goods, let’s assume these are valued 1.
Discounts: Price reductions offered to encourage sales or reward early payments, let’s assume these are also valued 1.
Gross Revenue of 104, minus returns, allowances and discounts of in total 4, get us to a Net Revenue of 100.

Another example, also from the world of corporate financial statements: Gross Profit vs Net Profit.
Gross Profit equals Net Revenue minus the cost of goods or services sold. Net Profit, or Net Income, equals Gross Profit minus all other expenses in the income statement.
If we continue with the same example, then Net Revenue is 100. Cost of goods sold is 40. If we deduct COGS from net revenue, we get to the first subtotal in the income statement: gross profit of 60. We then deduct operating expenses, which in accounting terms are the sum of selling, general and administrative expenses, as well as research and development expenses. If operating expenses are 20, then we get to Operating Income of 40, another subtotal. If we assume the company has no other income, and no interest expenses, then the only item left to deduct is corporate income taxes of 10. The bottom line, net income or net profit, is 30.

Gross is before, net is after!

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers finance training in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!

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