Learn about what net means in accounting, including how net profit, gross profit, and expenses play a role in your UK business’s financial health.
Overview of Net in Accounting
Net means the amount left over once all expenses, liabilities, and income taxes are subtracted. Net is the lowest number you can reach. This means you only get to the net once all the money you need to deduct has been taken.
The Difference Between Gross and Net
Gross profit is the entire amount of something before making any deductions. For example, gross income is everything you make before deducting anything like income tax.
Net is what is left once you’ve paid for all the deductibles. So, the difference between net and gross is that gross profit is what you start with and net is what you’re left with.
There are a few things to note when working out gross profit:
Gross profit is what a business earns after subtracting the cost of goods sold (COGS), this means the costs involved in selling and producing products.
Gross profits allow businesses to see how efficiently they can manage costs of supplies, labour, and production to make a profit from sales.
Essentially, gross profit is calculated by deducting the COGS from the total revenue in the same accounting period.
Here’s how to calculate gross profit:
Gross profit = net sales – cost of goods sold
Examples of Net Amounts
You’ll come across net items throughout financial documents, so understanding what they mean can be beneficial to your business.
Net revenue
Net revenue, also known as net sales, is the money a business makes from sales (revenue) once all returns and discounts have been deducted.
The formula for net revenue:
Net revenue = gross revenue – cost of goods sold (COGS).
Net assets
Net assets display a business’s total asset value by deducting the liabilities from the total assets.
Generally, assets are items a company owns. They can fall under two categories:
- Fixed assets: Items kept for over one year
- Current assets: Items that will be sold within a year
Liabilities, on the other hand, are everything a business owes. This can be in the form of credit, loans, operating expenses, and unpaid invoices.
Essentially, net assets work out the difference between what a business owns and what it owes. Companies with positive net assets are financially stable. A negative net asset could spell financial trouble.
Here is the formula for working out total new assets:
Net assets = total fixed and current assets – the current and long-term liabilities
Net income
Net income is sometimes referred to as net earnings or net profit. It represents the money earned after paying all the expenses.
If your net income is negative, it means that the earnings aren’t enough to cover the expenses. This is quite common for new companies, but it’s always best to keep an eye on it.
Here is how to calculate net income:
Net income = total income – total expenses
Net profit margin
Net profit margin is what a business makes and is expressed as a percentage (gross profit percentage). To do this, you need to calculate the net income (see above) in a given period.
Here is how to calculate net profit margin:
Net profit = total income – expenses x 100
FAQ
What is total vs net?
Total is referred to as gross, this is everything added together to give you the total amount. Net, on the other hand, is the total (gross) minus all the deductions.
Is net in accounting a debit or credit?
It can be both. If you are in a net credit position, it means there is a profit after all the deductions from the gross income. Net debit is when a company is in the negative.
Conclusion
Understanding the net in accounting is important because it can help you grasp the financial position your company is in. But there are so many moving parts that understanding everything can be daunting.
That’s where hiring an accountant can make things easier. Accountants know how to best record all the ins and outs to give you a precise balance sheet.
Sources:
https://corporatefinanceinstitute.com/resources/accounting/gross-vs-net/
https://countingup.com/resources/what-does-net-mean-in-financial-terms/