Difference between Gross and Net Amount


Difference between Gross and Net Amount

It is very common to hear about the terms gross and net, both when we talk about wages, when we analyze a company’s bottom line or when they tell us a macroeconomic data.

The gross and the net measure the same magnitude, but they are different concepts and we must know how to distinguish them so that there is no misunderstanding. The two thoughts are computable expressions used for the calculation of economic magnitudes.

The difference between gross and net that we must have clear is that a net amount is a final amount that remains after having made some change to the gross amount, in most cases after having made some type of discount (generally are taxes).

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Net = Gross – Discount

We could independently define gross as the total amount resulting from some activity, such as gross salary, gross sales or gross domestic product. The net, however, is the final amount that remains as a result of having applied a discount to something gross, the previous examples would leave the net salary, net sales, and net domestic product.

Let’s look at the most shared cases where gross and net expressions are used.

Gross salary and net salary

To understand the structure of a payroll, it is essential to know the difference between the concepts of gross wages and net wages. Especially when it comes to negotiating our salary and calculating how much money we are going to collect at the end of the month.

The net or liquid salary is the monetary amount that the worker receives, that is to say, the money that receives in his account after deducting the taxes and the contributions to the Social Security. The gross salary in the interchange is the total amount before these withholdings are applied.

Net Salary = Gross Salary – Taxes – Social Security

In a company’s income statement

Difference between gross profit and net profit

When we analyze a company’s profit and loss account we also find the terms gross and net.

Example is gross profit and net profit 

The Gross Profit is simply the result of subtracting from the total sales the cost of those sales, while the net profit, in addition to the sales costs, is also subtracted from taxes, interest, depreciation and overhead costs. Therefore the relationship between gross profit and profit net is as follows:

Net profit = Gross profit – taxes – interest – depreciation – overheads

In the case of the gross margin and the net margin, exactly the same happens, since the gross margin is the gross profit divided by sales and the net margin is the net profit also divided between sales. The net margin will be equal to the gross margin discounting the taxes, interest, depreciation and general expenses of the company. The margin is used to know the percentage of benefit that we have of each product or service we have sold.

Another example would be net sales, which are the result of subtracting returns, bonuses, rebates and discounts to gross sales.

Net and gross price

In the case of prices, the net value is greater than the gross value.  Since the net price is the one paid by the final consumer, the price that includes taxes. For example, when an entrepreneur sets the price of a product, it sets the price at which it must sell it to cover its costs and have some profit, at this price is known as the gross price. Then he adds the taxes ( VAT in this case), giving as final value the net price.

Net price = Gross price + taxes (VAT)