Last editedApr 20222 min read
Every invoice shows relevant information about a business transaction, including the price of goods or services sold. When it comes to price, businesses can choose between net cost and gross cost. So, what’s the difference between net cost and gross cost, and which should your business use on its invoices? Keep reading to find out more.
Net price vs. gross price: what is gross cost?
Before diving into how these terms should be handled on your invoices and accounting ledgers, it’s helpful to first examine the fundamental difference between net cost and gross cost.
Gross cost refers to the full cost of an asset’s acquisition, including the purchase price plus any applicable fees and costs. These might include things like:
Cost of transport
Cost of training or testing
Gross cost is also used when talking about loans, where the total (or “gross”) cost of the loan would include both principal and accumulated interest.
Net price vs. gross price: what is net cost?
The main difference between net cost and gross cost is that net cost subtracts any associated benefits derived from the asset’s value. For example, if you purchase new equipment for your business and use it to produce goods, you will subtract the margin of these goods from the equipment’s gross cost. Net cost may or may not be less than gross cost, depending on profits or gains earned. However, in the case of invoicing, net price simply refers to the gross price minus sales tax and other fees.
Net price vs. gross price for invoicing
It’s important to understand the difference between net cost vs. gross invoice price both for accounting and invoicing purposes. In the context of an invoice or accounting journal entry, the terms primarily relate to added tax. If you’re using invoicing software, you can change your settings to reflect product prices in either gross or net prices. A net cost vs. gross invoice price journal entry also reflects the difference in cost. While both options are valid, you should aim to remain consistent across all accounting documents.
Gross price invoicing
Gross invoices show the purchase cost by automatically including sales tax and other fees. They won’t break these down into itemized lists, but simply show the total value with tax added. The full cost of a product’s price is directly reflected in the invoice.
Net price invoicing
Invoices that use net pricing will show the item’s pre-tax price instead. These are generally preferred by companies that are tax exempt, or to reflect the true cost of the product without added fees. While a gross invoice shows a single figure, a net invoice will have an itemized breakdown of each cost instead. You’ll see the original cost of goods with separate lines for discounts and tax.
Net cost vs. gross invoice price: which should you choose?
There’s no right or wrong answer when it comes to selecting a pricing method. While some customers prefer the simplicity of a gross invoice price, others prefer a full breakdown of taxes and fees so they can see exactly where their money is going. With net cost vs. gross invoice price journal entries, there is similar flexibility provided you’re consistent with your accounting format.
One exception is international trade. While American companies don’t use a value added tax or VAT, businesses based in other countries are required to add VAT to their invoices. Some companies will use net invoices as a result to prevent customers from paying VAT. Otherwise, the cost of VAT is automatically added to the cost of goods in a gross pricing model. These are just a few factors to consider when choosing the best template for your business’s invoices.
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