Which of the following best describes the difference between gross income and net income in the context of the fundamental accounting equation?

• A. Gross income is the amount of cash on hand, while net income is the total value of assets.
• B. Gross income includes only operating revenues, while net income includes only non-operating revenues.
• C. Gross income is calculated after taxes, while net income is calculated before taxes.
• D. Gross income is total revenue before any expenses are deducted, while net income is the profit remaining after all expenses have been subtracted from total revenue.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the fundamental accounting equation, which is Assets = Liabilities + Equity. This equation provides the framework for understanding financial statements and income calculations.
2. Step 2: Define gross income. Gross income refers to the total revenue generated by a business before any expenses, taxes, or deductions are subtracted. It represents the raw earnings from operations.
3. Step 3: Define net income. Net income is the profit remaining after all expenses, including operating costs, taxes, interest, and other deductions, have been subtracted from the total revenue. It reflects the actual profitability of the business.
4. Step 4: Compare gross income and net income. Gross income is a preliminary figure that shows the total revenue, while net income is a refined figure that accounts for all costs and deductions, providing a clearer picture of the business's financial health.
5. Step 5: Relate the definitions to the fundamental accounting equation. Net income contributes to the equity portion of the equation, as it represents retained earnings or profits that can be reinvested in the business or distributed to shareholders.