What is the Definition of Gross Income in Business Finance?

Gross income in business finance refers to total revenue minus cost of goods sold before taxes and other expenses. This guide explains calculation methods, key differences from net income, and examples for individuals and companies.

By Brad Nakase, Attorney

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Table of Contents

1. Introduction

2. Definition of Gross Income

3. Gross Income’s Function

4. How to Estimate Your Gross Income

5. Net Income versus Gross Income

6. Individual Gross Income Example

7. Sample of Business Gross Income

8. How Does Gross Income Differ From Net Income?

9. What Is the Calculation of Gross Business Income?

10. Are Taxes Paid Included in Gross Income?

11. Bottom Line

Introduction

Both personal and commercial finances require an understanding of gross income. This number, which represents your income before taxes and deductions, has a significant influence on everything from tax filing to budgeting. Earnings from freelance labor, salary, or rental income are examples of individual gross income. For businesses, it typically refers to total revenue before expenses are deducted. We’ll explain what gross income is, the way to determine it, and some common fallacies about it below.

Definition of Gross Income

It’s the total amount of money earned by a person before taxes and other deductions are made. It encompasses money not only from work but also from other sources. Income that is paid in cash is not the only kind. Property or services that are received are also included. Generally, when it shows up on a paycheck, it is called gross pay.

A company’s gross income, gross margin, and gross profit are equivalent terms. The income statement shows the gross income of a business. It is the total revenue minus the cost of goods sold.

Key Conclusions

A company’s total revenue less the cost of items sold is its gross income.
Gross income is reported on an individual’s income tax return, where it is converted to adjusted gross income and, following specific deductions and exemptions, to taxable income.
Additionally, when trying to obtain a loan, people might be asked to disclose their gross income.
Companies often utilize gross income rather than net income to more accurately assess the performance of their individual products.

Gross Income’s Function

The components of a person’s and a business’s gross income are different. Using a current pay stub or figuring out their hours performed and wage, a person can quickly ascertain their gross income. A company’s gross income may need a little extra calculation.

When deciding if a person is a suitable borrower or renter, lenders & landlords look at their gross income. Before deducting deductions, gross income represents the foundation for both state and federal income tax forms.

A company computes its gross income to assess the performance of the product-specific division of the organization. Utilizing gross income & restricting the expenses that are reflected in the assessment can help it better understand what factors contribute to success or failure. When trying to determine the performance of a particular product line, a business would rather not see its rent expenditure reflected in performance. Rent is an administrative cost that is unconnected.

How to Estimate Your Gross Income

The method used to calculate gross income by a business differs slightly from that used for an individual. Although each entity employs a different classification of earnings and expenditures, the two formulas are identical.

1. Definition of Gross Income for Individuals

Wages and salaries are only one type of income that is included in the gross income calculation on a person’s tax return; other types of income include tips, capital gains, dividends, rental payments, alimony, pensions, and interest. The outcome, after deducting any additional tax deductions, becomes AGI (adjusted gross income).

Although some sources of income are excluded from gross income for taxation, a lender or creditor may nevertheless include them in their calculation of gross income. Some inherited assets or gifts, life insurance payouts, state and municipal bond interest, and some Social Security payouts are examples of prevalent nontaxable sources of income.

Generally speaking, people can claim their entire salary as gross earnings for non-tax reasons. When a person is requesting a loan, their individual gross income is the sum of their earnings before taxes are subtracted and costs are paid. To be able to standardize the calculation of gross income, certain lenders might also need their AGI.

2. Definition of Gross Income for Businesses

An income statement for a business may occasionally include the line item for gross income. If the figure is not displayed, it’s computed as gross revenue less COGS.

Gross Income = Gross Revenue – Cost of Goods Sold

In the context of business, gross income is often known as the gross margin. As a metric of profitability, there is also the gross profit margin, which can be more accurately expressed as a percentage. When the direct costs of producing a product or rendering a service are deducted, a business’s gross income shows how much income it makes from its offerings.

Gross income for businesses can be determined for the entire firm or for individual products. By employing a chart of statements that enables the tracking of earnings and expenses by product, a business may see the amount of profit every item is earning.

Although the gross revenue statistic accounts for the direct costs of manufacturing or delivering goods and services, it excludes expenses for selling, administration, taxation, and other expenditures associated with managing the firm as a whole.

Net Income versus Gross Income

Businesses often use two phrases to describe profit: gross income & net income. Both are also suitable to describe the amount of money that a household earns or receives.

An individual’s net income is the total amount left over after all of their private expenditures have been covered. When all revenue is subtracted from all personal expenses, individual net income is the result. Gross income, on the other hand, restricts the amount that can be subtracted from total revenue collected.

A person’s net income is more like the amount of their last salary. Although a salary is a wonderful illustration of how expenditures diminish revenue, the person probably has greater expenditures than what is subtracted from their compensation.

A company’s net income is calculated as total revenue less total expenses. Like gross income, these costs include the costs of items sold. Net income additionally incorporates selling, general, administrative, taxation, interest, & various other expenditures. These aren’t taken into account when calculating gross income.

A company’s gross income gives it a far better status. Net income includes all aspects of expenses.

Because it includes both revenue and the exact costs incurred to get that revenue, the definition of gross income often serves as a more accurate metric for comparing businesses that are not identical. The efficiency with which each business made money is examined.

Individual Gross Income Example

A certain person earns $ 75,000 annually. He earns $1,000 interest on a savings account. He receives $500 in dividends from stocks annually, & earns $10,000 annually from real estate rental income. His gross yearly income is $86,500. That is about $7,200 a month in gross income.

Let’s now assume that this person pays $1,500 in housing costs, 450 dollars in loans for education, and three hundred dollars on an auto loan each month. When determining gross income for non-tax reasons, three of these costs are not included. A person’s gross income simply takes into account the money they make.

Regarding the person’s federal income tax, let’s assume that they paid $500 in interest on their student loans during the previous year. On their tax return, the interest on student loans is an additional deduction that is utilized to calculate the adjusted gross income. The person’s AGI equals $86,000 (86,500 – 500) if their income was the same for the current year as it was last year.

Sample of Business Gross Income

Total net sales for the three months that ended September 2023 were $89.5 billion, according to Apple’s unified statement of operations. These products cost the corporation $42.59 billion to produce, and as a component of the cost of goods sold, it also paid $6.49 billion for services. A $40.43 billion gross income was declared by Apple.

There were also $6.2 billion for selling, general, and administrative costs, $7.3 billion in R&D expenses, and $4.04 billion for income taxes for Apple. When determining gross revenue, none of these costs is included. Only the net sales of a business, less COGS, are included in its gross income.

How Does Gross Income Differ From Net Income?

Your net income represents the amount of money you actually make from your activities. Workers’ take-home salary is what it is. For businesses, it’s the money left over after all costs have been paid. The gross income of a business excludes every other cost and only comprises COGS.

What Is the Calculation of Gross Business Income?

A company’s gross income is the company’s gross revenue minus its COGS. If a company had sales of $500,000 of goods and it took $100,000 to make those goods, its gross income will be $400,000.

Are Taxes Paid Included in Gross Income?

The entire amount of money produced by an individual or business before taxes are deducted is known as gross income. It is computed by deducting costs, interest, & taxes from the total sum of revenue received.

Bottom Line

Gross income is the sum of money generated before taxes and other deductions are made. Typically, a worker’s pay stub will list both their gross and take-home salary. To determine their gross income, companies may also need to include additional revenue streams they have produced. Additionally, your annual Form 1099 or W2 will show your entire gross income.

The total amount of money that you make each month can be used to calculate your monthly gross income. Your take-home pay or the amount you get paid directly by your employer will probably differ from this. The number of hours you put in a particular month multiplied by the hourly rate of pay or your monthly compensation before taxes is another way to compute it.

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What is the Definition of Gross Income in Business Finance?

Introduction

Definition of Gross Income

Gross Income’s Function

How to Estimate Your Gross Income

Net Income versus Gross Income

Individual Gross Income Example

Sample of Business Gross Income

How Does Gross Income Differ From Net Income?

What Is the Calculation of Gross Business Income?

Are Taxes Paid Included in Gross Income?

Bottom Line

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