Calculating Gross Income and Net Income

Gross Income

What is Gross Income?

As a concept, gross income is exactly what it sounds like: the total of all sources of “gain” or revenue, before any considerations of deductions like expenses or taxes. But how to calculate it and what it constitutes differs in practice, based on if the accounting is occurring for an individual or a business.

Individuals who are calculating gross income should be considering all sources of income, including salaries and wages paid, any capital gains, dividends earned, rental income, spousal support and, yes, even tips. However, there are exceptions: certain retirement plan contributions or “income” from a sale of a home does not count.

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Is Gross Income the same as Gross Profit?

For businesses, gross income is also known as gross profit and it appears on the income statement.

What’s interesting is that gross income for a business includes a company’s revenue minus the cost of goods sold. Often, as a mark of profitability, this number will be expressed as a percentage of revenue, which is known as “gross margin”.In other words, what was the margin between how many sales were made versus the cost to actually produce these?

How to Calculate Gross Income?

Calculating gross formula is a bit of an intensive undertaking for individuals because it considers revenues from all sources.

You’ll have to categorize all items, activities and sources before you get started, if you haven’t been record-keeping through the tax year. You’ll also want to pull together your bank statements to see if there’s anything you’ve missed.Gross income for businesses is a figure found on the income statement. Total sales and cost of goods sold are the main figures that will first have to be tabulated. For every unit sold, essentially, there should be a direct association of costs in kind.

Example

Let’s say you have a product involving apples and sugar. These are your raw materials.

If you sell the final product as a candied apple, you should see entries for the purchase of apples and sugar.

The total amount of purchased apples and sugar quantity is a cost of goods sold. That’s what it took to produce a candied apple that is then sold for a particular amount, over and above these “cost of goods” sold.

The difference between the selling price and this cost of goods is, essentially, gross income on one unit.

So this means that “cost of goods” are direct costs that you can tack on to the production, not miscellaneous or indirect costs.

For example, the labor involved to produce a unit for sale is a direct cost. The account executive’s accommodation expense as he or she travels to market this product and get buyers on board with sales is not.

Gross Income Formula

The gross income formula is pretty straightforward but involves a lot of background prep work and record-keeping. There have to be accurate records kept on cost of goods sold versus units produced.
Gross Income Formula
Gross income = Total Revenue (i.e. Total Sales) – Cost of Goods Sold
As a Percentage or Margin:
Gross Profit Margin = (Gross Income / Total Revenue) * 100

As you’re probably getting a sense now, it’s not the formulas for these figures that are complicated. Any student with basic arithmetic skills can master it. Which means, any 6 year old could figure out gross income.

The complicated bit is the stellar records you’ve got to be keeping – continuously, throughout the year! – to be able to pull those numbers when the time comes to create an income statement. And, as a business, you want to be doing this for more than just tax time or to update investors.

How MoneyPenny Can Help You Find Gross Income?

 

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You want to be doing this as an internal check, to see the financial health of the company as well as get a sense of how popular the product really is, if it’s selling and if there needs to be a re-evaluation on some of the costs of goods (for example, should you be buying a raw material from a cheaper supplier?) or the retail price.
Accounting software like MoneyPenny acts in two really important ways
  1. MoneyPenny keeps track of your sales and cost of goods sold so that you’re not wasting extra time with data-entry and manual record-keeping.
  2. MoneyPenny acts as your hub for key financial information that can help you make important decisions moving forward.

For example, if you’re looking to generate an income statement, in MoneyPenny, you can pull this information together in a few clicks. You can also choose to represent the data in various graphical forms so you can see how to grow even more profitable.

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