What is meant by ‘net of’ in accounting or tax and other business related subjects?

The expression ‘net of’ represents the exclusion of something from a particular sum.

For example net of tax means the resultant amount which is exclusive of tax or in other words the amount we get after deducting tax is net of tax amount.

We can see its uses in wide variety of ways in accounting books, standards, financial news, business documents, reports, financial statements, business manuals, policy guidelines etc.

Some of the examples are:

  • Interest expense net of capitalized borrowing costs
  • Rental expenses net of prepaid rent
  • Tax expense net of tax paid in advance or tax liability net of tax rebates
  • Gross profits net of operating expenses
  • Total assets net of total liabilities

To understand more consider the following example.

Example

ABC Ltd paid 12,000 towards factory rent. As an accounting rule only such expenses can be recognized in the profit and loss that relates to this period and all the prepayments are treated as current assets.

If only 10,000 out of 12,000 paid relates to this period then 2,000 is prepayment i.e. amount paid in advance but expense has not been incurred yet. This can be written as:

Rental expense is the amount paid net of prepayments

10,000 = 12,000 2,000

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