The terms "net" and "gross" appear in business accounting and personal accounting in reference to both revenue and income. Comparisons of gross and net revenue allow a company to measure how well its merchandise and services perform in terms of sales while comparisons of gross and net income illustrate overall company performance.
Gross revenue refers to the total amount of money brought into a company through sales of goods and services during a given accounting time period. Depending on your company's business structure, gross revenue could refer to cumulative sales receipts for all parts of your business or refer to the gross revenue of specific segments of your business. For example, a company with both a storefront and an online store may want to calculate the gross revenue for each sales channel independently before calculating company-wide gross revenue.
Net revenue takes the gross revenue and deducts the cost of returns. Internet or catalog orders lost in transit or items that required a total replacement instead of a return may also serve as deductions from gross revenue depending on your company's accounting system. If replacement orders are logged in your computer system with their selling price assigned instead of a $0.00 charge, the selling price of the replacement item must be deducted from the gross revenue as only one actual sale took place.
Comparing Revenue Totals
Your gross and net revenue numbers provide important data relating to your companies sales and returns. Simple math allows this data to become easily processed percentages that can be used to enhance or better illustrate numbers featured in company presentations or reports. For example, if your company sells $50,000 in products in a year and accepts returns totaling $3,000, its net revenue is $47,000. Dividing the net revenue by the gross of $50,000 allows your company to publicize the fact that 94 percent of its revenue is earned without incident within an accounting period. Conversely, the 6 percent of revenue lost to returns can be used as a motivational point by quality control personnel who seek to reduce the percentage.
Sometimes the concept of net and gross revenue is mistaken with net and gross income. Only lost sales based on returns or replacements are subtracted from gross revenue to arrive at net revenue. When comparing gross income with net income, the amount of deductions increases to include the full spectrum of business expenses.