The Differences Between Net and Gross Income for a Business

Gross income and net income are both presented on a company's income statement. Gross income is the earnings that remain after you subtract your costs of goods sold,

or COGS, in a period from the revenue generated. Net income is the bottom line profit that you earn after you account for all revenue and expenses.

Location

A simple distinction between gross and net income is their location on the income statement. Gross income is the first profit line shown on the statement. It is a simple computation of top-line revenue minus COGS.

Net income is the last line item on the income statement. It is the final result after you lay out all of the revenue and expenses.

Regular Vs. Irregular

One key difference between gross income and net income is that gross income only includes revenue earned from regular activities and the costs directly associated with earning them.

Net income is the result of all revenue and costs, including one-time or irregular items. After gross profit, fixed costs are subtracted to arrive at operating income. Then,

 irregular revenue and expenses are included to reveal the period's net income. The sale assets is an irregular revenue example, while legal expenses may be a one-time expense.

Importance

Any type of income is important to a business. Net income is often called the bottom line results because it is your actual earnings for a period. However,

 "The Business Owner" indicated that gross profit margin is the most important clue to company financial health. Margin is the percentage of your revenue that is converted to profits.

 High gross profits are essential to stability in earning net income over time.

Interpretation

Strong gross profits combined with a growing gross profit margin than exceeds industry norms is a great sign for a business.

 If gross margin slumps, management has to explore opportunities to improve revenue performance or trim COGS.

Net income must be observed over time because major one-time revenues or expenses can be misleading on a single income statement.

High gross profits and low net income may signal a need to negotiate new fixed costs or reduce wasteful spending.