What’s the difference between net and gross? If you are running a business, you need to know the answer to this question. Doing so will enable you to determine the difference between gross billings and gross receipts and make the correct calculations when accounting for your business monies.
What Is The Difference Between Net And Gross?
Gross refers to the whole of something within a business, while net is what remains after you deduct some things. It can apply not just to income but to assets, liabilities and other kinds of earnings that your business makes.
For example, in the case of gross business income, you are required to determine the total amount of money your business has made after you sell your goods and services. On the other hand, net income refers to the residual amount after you have deducted all business expenses, which may include administrative expenses, overhead costs, tax, production costs, etc.
What Are Gross Billings?
Gross billings refer to the total cost of offering a service or the money charged for selling a product with zero adjustments or deductions. It is what you invoice your customers, even if you haven’t received all the money yet.
For example, if you sell five machines worth $500, your gross billings are $2,500, even if some of the payments have not been processed yet. But suppose you live in a state that charges sales taxes of five percent. In that case, your gross billings would be $2,625.
While gross billing gives you an idea of how much you should ideally make, it is usually inaccurate. That is because it does not factor in the changes that may have taken place since you made the sale.
For example, if two of your machines are faulty and the customers return them, you would have to refund their money. In that case, you would only make $1,500 and not the $2,500 you write down as your gross billings.
What Are Gross Receipts?
Gross receipts refer to the entire amount of money your business receives within a specified account period from all sources. Think of it as the total revenue that your business makes in any given year. And under no circumstances should you exclude any costs or expenses you may have incurred while running the business.
Gross Billings vs. Gross Receipts
Both gross billings and gross receipts play a role in the company revenue and what your final financial statements look like. Therefore, it is important you learn the differences between them.
One of the most significant differences between gross billings and gross receipts is that the former tends to involve income from the sales of goods and services, which form the core operations of a business. However, the latter involves business income from all sources, including dividends, donations, tax refunds, royalties, etc.
Whereas gross billings refer to money that you have and don’t have yet, gross receipts only deal with money that is actually in your account. Therefore, the latter provides a more accurate view of your company’s financial standing since it reflects the reality during a particular time.
Gross receipts are sometimes taxable, depending on your state. They are usually subject to a gross receipt tax. However, gross billings are unlikely to be taxed as-is since the amounts you write down are usually not final.
It helps to understand not just what gross receipts and billings are, but the differences between them and their impact on your final business revenues. Generally, gross receipts offer a better idea of where your business stands at any given moment because what you bill is subject to changes if complications arise.
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