The total gross sales made by a company over a specific time period are referred to as gross revenue in accounting. It is the entire amount of money that the company received, with no deductions made for any expenses. The difference between a company’s gross revenue and all of its costs, including fixed costs, is known as net revenue or net income.
Because gross revenue only gives you a partial picture of your company’s overall picture, it’s critical to understand the differences between the two. Budgeting cannot be done using the gross sales of your business. Although net income offers a much more complete picture, it can be difficult to understand without knowing the context of gross revenue.
What distinguishes gross revenue from net revenue?
The discrepancy between your gross and net revenue is equivalent to your company’s expenses. Direct costs of goods sold (costs that are directly attributable to particular units or product lines) are among them, along with overhead costs, other variable expenses, and direct costs of labor.
Net revenue = Gross revenue minus expenses.
The following factors contribute to the difference between gross and net revenue:
- Cost of goods sold: These are the direct expenses your business has to pay to manufacture products or buy inventory.
- Advertising, web design, and other brand-building and marketing expenses are included in the category of marketing costs.
- Everything you need for the office, from paper clips to toilet paper, is referred to as office supplies.
- Paying for facilities, electricity, water, and other related services is referred to as “rent and utilities.”
- Salary, wages, commissions, and retirement benefits are all considered to be part of employee compensation.
- Taxes: Before calculating net income, payroll taxes, excise taxes, sales taxes, and income taxes are all subtracted.
- Legal and administrative expenses: Your net revenue is used to cover any fees paid to attorneys, accountants, and other consultants.
- Technology: This covers the price of any software or additional subscriptions or licenses.
- Dividend payments are typically not included in the calculation of net revenue, whereas interest payments are another item that must be subtracted from gross revenue. These payments are subtracted later in the accounting process for your company, after net revenue has been determined.