NAME [ABM 005/Business Math]

Grade Level: 12

Lesson Title:
The difference between gross and net income

Learning Objectives:
At the end of the session, I will be able
1. To differentiate between gross and net income

Teacher Discussion – (20 min)

Concept Notes Taking – (5 min)
Direction: I will give you 5 minutes to take down notes that will be shown on
the Smart TV, create your own questions and summarize the topic.
QUESTIONS: NOTES:

 The concepts of gross and net income have different meanings,

depending on whether a business or a wage earner is being discussed.
For a company, gross income equates to gross margin, which is sales
minus the cost of goods sold. Thus, gross income is the amount that a
business earns from the sale of goods or services, before selling,
administrative, tax, and other expenses have been deducted. For a
company, net income is the residual amount of earnings after all
expenses have been deducted from sales. In short, gross income is an
intermediate earnings figure before all expenses are included, and net
income is the final amount of profit or loss after all expenses are
included.

For example, a business has sales of $1,000,000, cost of goods sold of

$600,000, and selling expenses of $250,000. Its gross income is $400,000 and
its net income is $150,000.

The main flaw in the use of gross and net income for a business is that
the gross income figure is more likely to be closely related to the results of
operations, while net income can include a variety of non-operational expenses,
gains, and/or losses. Thus, the two calculations are based on different sets
of information, and are used in different types of analysis.

For a wage earner, gross income is the amount of salary or wages paid to
the individual by an employer, before any deductions are taken. For a wage
earner, net income is the residual amount of earnings after all deductions have
been taken from gross pay, such as payroll taxes, garnishments, and
retirement plan contributions.

For example, a person earns wages of $1,000, and $300 in deductions are
taken from his paycheck. His gross income is $1,000 and his net income is
$700.

Developmental Activity – (5 min)

Turn and Talk. Directions: I want you to turn to your buddy and discuss the
following questions. Use your time share ideas about the topic differentiate
the gross and net income.

Gross income is the revenue a business receives, minus COGS. If we go back to

our vending machine example, the gross income on your purchase of a drink is
$.50 ($1.50 - $1.00 = $.50).

Net income is the amount of income remaining after the other costs required to
run the business are subtracted. Again, using our vending machine example,
the vendor had to pay someone to restock the machine, electricity to keep the
machine operating, maintenance on a vehicle to deliver the drinks, etc. These
costs are totaled up and subtracted from gross income to calculate net income.
Net income is synonymous with profit.

1. Find the regular pay by multiplying the number of hours (40 or less) by
the hourly wage.
 2. Find the overtime pay by multiplying the hourly rate by the overtime rate
(usually 1.5) and then multiply that rate by the number of hours that
exceed 40.
3. Add the figures from steps 1 and 2.
Here’s an example

 Theresa worked 45 hours last week. If her hourly rate is $10.50 per
hour, find her total gross earnings.

 Multiply 40 x $10.50 = $420.00

 To calculate the overtime amount, multiply her hourly rate by 1.5:

$10.50 x 1.5 = $15.75

 Multiply the overtime rate ($15.75) x the number of overtime hours (5):
$15.75 x 5 = $78.75

 Add the regular and overtime pay: $498.75

Guided Practice – (5 min)

Think-Pair-Share. Directions: I want you to think with your pair to share and
answer the following problems. Identify how to get gross and net income

1. If Barb's Gas Station had $2,000,000 in revenue from the sales of gas and
Barb spent an average of $150,000 per month paying for the gas she sells,
what is Barb's gross income?

$1,850,000


 $2,000,000

$500,000

$200,000

2. What is the difference between gross income and net income?

Gross income is the total amount of all money collected on sales while
net income is the amount after subtracting the direct cost of those sales.

Net income is the total amount of all money collected on sales while
gross income is the amount after subtracting the direct cost of those
sales.

None of the answers given describes the difference between gross and net
income.

Gross income is the total income after subtracting COGS, but before
subtracting the cost of running the business; net income is the profit left
after subtracting the cost of running the business.