When you receive an invoice, it is highly likely that you will see two different prices at the bottom.
These prices will be the gross price and the net price
This can be a little confusing at first but in reality, the difference is simple:
What is the gross price of an invoice?
To put it simply, the gross price is the price of the goods PLUS any sales taxes.
In the UK, the sales tax is VAT, and sometimes the gross price can be referred to as the VAT-inclusive price.
The gross price is the price that you will actually pay over to the supplier. It is worth noting that if you are a VAT-registered business, you may be able to claim the VAT back on the invoice, see more on this here.
What is the net price of an invoice?
The net price is simply the opposite of the above. It is JUST the total price of the goods without adding sales tax.
The reason for including the net price is so that you can see what the goods actually cost and as mentioned, if you are registered for VAT, the sales tax is going to be claimed back anyway so the net price is the true cost of the invoice to the business.
Why might an invoice only have one price?
There are situations in which the invoice will not include a gross and net price. Instead it will just show one price (usually described as the “invoice total”).
The most likely reason for this is because the business issuing the invoice is not registered for VAT. As such, they are not able to charge VAT and therefore there is no sales tax to be added to the invoice.
Therefore, the total cost of the invoice is ONLY the cost of the goods.
What else might affect the gross and net price of an invoice?
The most common difference between gross and net prices on an invoice is the element of sales tax.
However there are other potential reasons that there could be a difference
For example, if there is a discount being received from the supplier you may see another line on the invoice referred to as “total price net of discount”.
Another scenario in which the gross price can differ from the net is if there is some form of extra charge associated with the goods. For example, shipping or a service charge. In this case the gross price will be calculated as follows:
Net price of goods + shipping costs + service charge + VAT/sales taxes = Gross price payable to supplier
These are the main differences between the net and gross prices included on an invoice. For more information on the basics of invoice please refer to the this article. Another common questions related to gross/net amounts relates to sales prices which we have discussed in this article.
Perhaps the most common use of the word “gross” in the accounting world is in relation to gross profit and calculating gross profit margins. Refer to our post that discusses the meaning of gross profit here.
