What is Gross Income? Meaning & Examples

Understanding gross income is essential. This is because gross income is the starting point for calculating many different income types. It helps you determine your taxable income and allows you to pay back your loans and rent. 

Knowing your gross income is an essential part of allowing your business to grow but it won’t help your business until you learn why it is important for your business, how to calculate it, and how it differs from net income. Read this article to discover the answers to these questions.

What is Gross Income?  

What does gross income mean? The gross income definition differs depending on whether we’re discussing an individual or a business. Individual gross income is the money you earn before taxes and any other deductions are subtracted. 

Annual gross income comprises all sources of personal finance, including hourly wages, salary, tips, bonuses, savings account interest, rental income, and dividends from stocks and bonds. Individual gross income is part of an income tax return. After certain deductions, it will become adjusted gross income and then taxable income. 

For businesses, gross income is the company's revenue from all sources minus the cost of goods sold (COGS). It may also be referred to as gross margin or gross profit in financial statements. 

The company's revenue sources can include income from intellectual property, selling goods and services, capital gains from investments, and income from rental property, to name a few. In the profit and loss statement, gross profit is a line item.

How to Calculate Gross Income? 

Below is the formula for calculating a business’ gross income or gross profit: 

Gross Income = Gross Revenue - Cost of Goods Sold (COGS). 

1. Revenue: This is the total sales proceeds a company generates within a given period. 
2. Costs of Goods Sold (COGS): These are your direct costs incurred for producing goods. This will include materials, packaging, labour, and freight. 

Both of these components can be found on the company’s income statement. After calculating the gross income, you should find the operating costs on the income statement. The gross income metric includes all production-linked expenses. However, all non-operating expenses are excluded during computation. 

Non-operating expenses are any expenses not directly related to the principal activities of a business. These may include selling activities, taxes, administration, and other costs related to running the business. 

You can calculate gross business income on a product-specific basis or a company-wide basis. If your company uses a chart of accounts that allows you to track cost by product and revenue by product, you will see how much profit each of your products is making. 

Example of a Gross Income Calculation 

Let's assume that the gross revenue of an ink manufacturing company totalled $1,300,000. These were the expenses: 

• Cost of raw materials: $150,000 
• Cost of equipment: $340,000 
• Packaging and shipping: $100,000 
• Supply costs: $60,000 
• Labour costs: $150,000 

The gross profit will then be calculated as follows: 

Gross income = 1,300,000 - (250,000 + 340,000 + 100,000 + 60,000 + 150,000) 

Gross income = 1,300,000 - 800,000 

Gross income = $500,000

Importance of Gross Income

If you’re looking to associate with new entities, your gross earnings are a vital piece of information they would want to know. Knowing the gross profit of your business is essential for these three reasons: 

1. It demonstrates financial health. Your business’ financial standing demonstrates the firm’s ability to generate returns from core business operations. 
2. It reflects the efficiency of your business. This metric streamlines your corporate performance and business operations. 
3. It helps determine the profitability of your business. Determining the gross profit is an important part of calculating your business' gross profit margin (percentage return). 

Gross vs. Net Income 

Gross and net income have different meanings, depending on whether it concerns a business or a wage earner. Net income for individuals is the take-home pay you have received from your endeavors. 

In terms of a business, gross income, as mentioned before, is the amount your business earns from selling goods or services before tax, administrative, selling, and other expenses are deducted. 

Alternatively, net income is the residual amount of your company’s earnings after deducting all sales expenses. Gross income is the intermediate earnings figure before your costs are included. In contrast, net income is the final profit or loss after your costs are included. 

Their formulas are as follows: 

Gross Income = Revenue - COGS. 

Net Income = Gross Earnings - Expenses. 

For example, let’s say your business has sales of $1,000,000. Your cost of goods sold is $600,000, and your selling expenses are $250,000. Your gross income will then amount to $400,000, and your net income will be $150,000. 

In your income statement, you will notice it shows revenue and cost of goods sold. Your gross earnings will follow this. Net income is the bottom-line item of your balance sheet and is typically revealed after the other expenses. 

If your company’s net income is less than your gross income, you will need to cut other expenses, such as your indirect costs. Unlike gross earnings, net income recognises other incomes such as dividend income and interest income. 

Improve Your Business With QuickBooks Software! 

Do you feel better informed about gross income? Access more informative articles from the QuickBooks Resource Centre to improve the operation and performance of your small business. QuickBooks also provides a variety of outstanding software that will further enhance your business' financial wellbeing. 

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