When talking about sales made from a business it is quite common to hear the terms gross and net revenue.
In the UK most businesses have to add value added tax (VAT) to any sales that they make. VAT is an additional charge of 20% on top of the sales price.
The vat amount is not kept by the business selling the goods and must be paid over to HMRC at regular intervals. Likewise the business buying the goods will be able to claim the vat back if they are VAT-registered.
This is where the terms gross and net revenue come in to play. We have explained the meaning of both terms below:
What is Gross Revenue?
Gross revenue is the total value of a sale made including the VAT charge added on top.
This is the amount that will actually be charged to the customer and the amount that the customer will be expected to pay.
Please note that the VAT amount charged is not kept by the seller and will be paid over to HMRC at a later date
What is Net Revenue?
The net amount of the sale is the value of the goods excluding the VAT charge
Since most customers can claim the the VAT back on the purchase, they tend to only be interested in the net price of the goods. This is because the net price is the true cost to them.
An Easy Way to Remember the Difference.
There is a method to remember which way round the gross and net prices are which may seem a bit silly at first but is very effective.
To do this we simply look at the word “net” And notice that this is very similar to the word not. This can help us to remember that the net price is not inclusive of VAT.
What Gets Recorded in the Income Statement?
As we have discussed the VAT amount within the sale does not belong to the seller and therefore, must be excluded from the revenue figure within the income statement.
As a result of this the figure you see at the top of the income statement for revenue will be the net revenue and never the gross.
Important points
When looking an income statement you will also see a line called “gross profit”. It is important not to confuse the two as they are not the same and we have another post relation to gross profit which goes into more detail. This post can be found here.
Please note, the standard VAT rate is 20% as at January 2021 but this may change in the future. Please have a look at the official website to check for updates: https://www.gov.uk/vat-rates
Related Posts
If you found this post useful, you may want to check some of the other posts out within our “Income Statement Guide”:
Pingback: What is an Income Statement? - Online Accounting Guide