Understanding Gross Income Definition and Calculation

In 2024, Walmart was the top company by revenue. But how do you measure a company’s profitability? To do so, you need to apply the gross income metric, not the gross revenue method. What is it exactly? This article covers the gross income definition, the calculation process, and the difference between gross income and net income.

What Is Gross Income?

Gross income is the sum of money someone or a company makes before taxes and any deductions. In addition to earnings from employment, this encompasses revenue from all sources, including property or service. This metric is often used to assess loan eligibility, financial health, and tax obligations.

What Does Gross Income Mean?

Business and individual gross income have different components. It’s easier to understand gross profit for individuals because it’s clearly shown on a paycheck and pay statement. Gross income for a business requires a little extra calculation and explanation.

Gross income meaning for individuals is simple. ​It consists of all earnings before taxes — including commissions, bonuses, wages or salaries from employment, and tips. It may also include money generated from rental income, interest earned on savings, dividends from investments, and pensions. Combined, these elements make up a person’s total gross income, which gives a complete picture of their earnings before any costs or taxes are deducted.

Business gross income, also known as gross profit, is computed by subtracting the cost of goods sold (COGS) from total revenue. All direct production-related costs, such as labor and supplies, are considered COGS. Gross profit shows how efficiently the company produces goods or services. This metric is important for measuring a business’s profitability and overall operational performance.

How to Calculate Gross Income

Both businesses and individuals need to understand how to compute total profit. Private individuals can use it to determine their tax obligations and loan eligibility. Companies use it to measure financial performance and profitability, which is critical for setting prices and making budgeting decisions.

Individual Gross Income

To calculate gross income for an individual, you need to combine all revenue sources, such as salary, bonuses, rental income, and investment gains.

For example, Jasper works as a fitness manager and earns $50,000 annually. He also receives an annual bonus of $3,000 from the fitness center. Additionally, he gets $3,000 in interest and dividends from investments.

Now, let’s find out his total total profit:

Gross Income=Salary+Bonus+Rental Income+Investment Income

Gross Income=50,000+3,000+3,000=56,000

So, Jasper’s gross profit for the year, before taxes and deductions, is $56,000.

Business Gross Income

As mentioned earlier, for a business, gross income is found by subtracting the cost of goods sold (COGS) from revenue.

Let’s take a furniture retailer as an example. The store chain generates a total of $500,000 in revenue. However, the production of the furniture has direct costs, including raw materials, labor, and transportation, which amount to a cost of goods sold of $200,000.

Here, you need to use the gross income formula:

Gross Income=Total Revenue−Cost of Goods Sold

Gross Income=500,000−200,000=300,000

This means the business makes $300,000 before taxes, operating expenditures, and other charges are deducted.

Some people call this metric gross margin. You can calculate it for an entire company or a specific product. If the enterprise employs a chart of accounts that enables monitoring of revenue and expenses for each product, it can determine the profitability of each item sold.

Keep in mind that the gross profit measure includes the direct costs of producing or delivering goods and services. Still, it doesn’t take into account other expenses associated with sales, administration, taxes, and the broader costs of running the business.

Gross vs. Net Income

There’s one more metric for estimating the earnings of businesses and people. It’s called net income. Even though both of them reflect financial success, their roles in assessing profitability are different.

For individuals, net income is what remains after subtracting all personal expenses, including taxes, insurance, and retirement savings, from total earnings. Net income is calculated by subtracting these expenses from total income. It is usually equal to what people are paid in their paychecks but with some other personal expenses not subtracted.

Net Income=Total Earnings - Total Expenses

For businesses, net income is the final figure for money made after subtracting all business expenses like the cost of goods sold (COGS), administrative expenses, tax payments, and interest payments. While gross income shows how much money is made after subtracting COGS, net income provides a clear picture of a company’s financial standing by considering all the expenses that go into running the business.

Now that you know how to find gross income, let’s learn how to find net profit for businesses.

Net Income=Total Revenue−(COGS+Operating Expenses+Taxes+Interest)

Let’s take a fast-fashion retailer as an example. The company generates a total revenue of $800,000. To find net profit, we need to deduct all expenses — including running costs, COGS, operational expenses, interest, and taxes. The overall cost of materials, labor, and production is $300,000.

The first step here is determining gross income by subtracting COGS from total revenue:

Gross Income=800,000−300,000=500,000

Next, we subtract operating expenses, which include rent, salaries, utilities, and marketing. This company spends $150,000 on these expenses. We subtract this amount from gross income:

500,000−150,000=350,000

The retailer pays $70,000 in taxes and $30,000 in loan interest. We subtract these amounts:

350,000−30,000−70,000=250,000

So, the net profit of the business, after deducting all the costs, is $250,000.

Remember that a large gap between total profit and net income indicates substantial expenses for the company. Therefore, it’s wise to analyze these expenses to identify and to cut unnecessary ones.

Final Thoughts

Overall, gross income is a key measure for individuals and businesses in estimating financial success. Understanding it can help in obtaining a loan, financial planning, and calculating taxes. However, you shouldn’t focus solely on gross income because it can give you a false impression of financial stability. This metric should be analyzed alongside net income, which represents true profitability after expenses. Gross income offers a general perspective on earnings, whereas net income presents a more accurate picture of current profitability. By accurately analyzing both measures, individuals and businesses make wise financial decisions that support long-term stability and growth.