The terms gross and net may apply to various items. It causes some confusion about what items to include in each area. However, the difference between gross and net is straightforward. Usually, the term “gross” represents the total value of an item. It also helps calculate its “net” value, which requires some deductions. These terms are also relevant when calculating the costs of an item.
What does Gross Cost mean?
Gross cost refers to the total expense incurred on an item without deductions. It usually includes the entire acquisition cost of an asset or object. However, the gross value of an item may differ based on various factors. However, the above definition only includes purchases. For produced items, the gross cost includes all the expenses incurred to produce or manufacture them.
The gross cost of an item may include various expenses. These expenses may vary based on that item and its type. For example, the gross cost of an asset can consist of the following.
- The purchase price including sales and other taxes
- Transportation and freight costs
- Supplementary costs to bring the asset to its working condition
- Assembly and installation costs associated with the asset
- Electric installation and equipment costs
- Shipping costs
- Custom and port expenses and other import charges
- Testing costs
- Interest paid on finance to acquire the asset
- Training costs for the employees operating the asset
The gross cost of an item includes both primary and secondary expenses associated with it. These costs play a crucial role in calculating the gross cost for that item.
What does Net Cost mean?
Once companies calculate the gross cost for an item, they can adjust it to calculate the net cost. These adjustments include various deductions that are crucial in reaching the latter value. As stated above, net costs include the value of an item after deducting specific amounts. However, these deductions may vary from one item to another.
Companies can derive the net cost of an item by deducting any gains received from that item from its gross cost. These gains can differ based on how the company expects to use that item. In other words, the net cost of an item represents the actual economic loss from acquiring or producing it. It does not consider the gains associated with that item relevant to its cost.
Example
A company, Red Co., purchases an asset for $12,000. On top of that cost, the company also pays various ancillary expenses associated with the acquisition totaling $3,000. These expenses include items like taxes, shipping and transportation costs, etc. Therefore, the gross cost of the asset for Red Co. is $15,000 ($12,000 + $3,000).
However, Red Co. expects financial gains of $4,000 from the asset. On top of that, the company estimates its salvage value to be $1,000 at the end of its useful life. Therefore, the net cost of that asset based on the above gains is $10,000 ($15,000 – $4,000 – $1,000).
Conclusion
The terms gross and net are crucial in various areas. However, their definitions may differ based on the item under consideration. Gross costs include all the expenses associated with acquiring and bringing an asset to its useable form. These costs do not account for any deductions. On the other hand, net costs deduct the financial gains expected from that asset from its gross cost.
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