Gross Income vs Net Income

Gross Income: Gross income is the total revenue generated by a business or individual before any expenses, taxes, and deductions are subtracted. In a business context, it’s often the “top line” figure on an income statement, calculated as Revenue – Cost of Goods Sold (COGS). For an individual, gross income includes all forms of income, like salary, wages, tips, and capital gains.
Net Income: Net income is the amount left over after all expenses, taxes, and deductions are accounted for. In business, it’s the “bottom line” and calculated as Gross Income – (Operating Expenses + Taxes + Depreciation + Interest). For an individual, net income is what remains after taxes and other deductions, like Social Security and health insurance, are subtracted from the gross income.

For Businesses: Gross income gives a preliminary view of profitability and financial health, while net income provides a more comprehensive picture. Investors and creditors often scrutinize both to gauge performance and financial stability.
For Individuals: Understanding the difference helps individuals manage their finances more efficiently. Gross income is useful for budgeting before the month starts, while net income shows what is actually available for saving, investing, or spending.

Business Gross Income Types:
- Operating Revenue
- Non-operating Revenue (e.g., sale of assets)
Business Net Income Types:
- Operating Income
- Non-operating Income
Individual Gross Income Types:
- Salary
- Wages
- Tips
- Capital gains
- Dividends
Individual Net Income Types:
- Take-home pay
- Net capital gains
- Net passive income

For Businesses:
- Gross Income = Revenue – Cost of Goods Sold
- Net Income = Gross Income – (Operating Expenses + Taxes + Depreciation + Interest)
For Individuals:
- Gross Income = Sum of all income sources
- Net Income = Gross Income – (Taxes + Social Security + Health Insurance + Other Deductions)

For a Business:
- Revenue: $1,000,000
- COGS: $500,000
- Operating Expenses: $300,000
- Taxes: $50,000
- Gross Income: $500,000
- Net Income: $150,000
For an Individual:
- Salary: $60,000
- Taxes: $12,000
- Social Security: $3,600
- Health Insurance: $1,200
- Gross Income: $60,000
- Net Income: $43,200

Sensitivity: Gross income is less sensitive to changes in various expense categories compared to net income, which accounts for all costs.
Completeness: Gross income does not provide a full picture of financial health as it ignores many expenses.
Comparability: Varying taxation rates and accounting practices can make it challenging to directly compare net incomes across companies or individuals.
Cash Flow: Neither gross nor net income directly reflects the cash position of a company or individual, which may be more critical in some contexts.

Understanding both gross income and net income is essential for a nuanced view of financial health, whether it’s for a business or an individual.