Gross income is the total amount of money that an individual earns before any deductions of taxes. For example, an individual receives $3000 as a salary from the employer. In actuality, he receives a check of $2600 only. Here, the amount of $2600 is the net income of the individual. Hence, the amount of $3000 is the gross income of the individual.
There are two different concepts under which it can be studied. The first concept of studying it is in the business sense. And the second concept is of the individual’s wages and incomes.
As explained in the above example, for an individual, the total pay that his employer pays before deducting taxes and other deductions is his gross income. This income includes incomes from every source and not only incomes received in cash but also the income receive in kind.
Now in the case of companies, this term is interchangeable with the terms of gross margin or gross profit. This income is found in the income statement of the company. It is the total revenue from all sources, less the company’s cost of goods sold.
Significance of Gross Income
The gross income of an individual helps the lenders or landlords to determine the worthiness of the borrower or renter( individual). This income is the starting point while filing the income tax. By subtracting deductions available from gross income, the total tax amount the individual has to pay is determined.
For calculating gross income for an individual for the purpose of the income tax returns, we include not only the salaries or wages but also other sources from which income can be generated. For example, tips, rental income, alimony, pensions, interest income, dividend, etc. After subtracting all the permissible deductions, we receive the adjusted gross income. After deducting the other deductions described in the tax form from adjusted gross income, we receive the taxable income amount. Now, after applying for deductions and exemptions, the resulting tax amount can be very less than the gross income of the individual.
There are some sources of income like life insurance payments, inheritance, gifts, etc., that are not included in gross income for calculating the income tax. But these incomes are included while calculating the income for the creditors or lenders.
In the case of the company, the gross income or gross profit shows the profitability of the company. The gross income of a company is revenues(sales) minus the cost of goods sold or the cost of service provided. Cost of goods sold/service provided includes the direct cost of production or of providing the services. The cost related to the sales and promotion activities, taxes, administration expenses, and expenses relating to the day-to-day working of the company is not included in the company’s gross income.
This helps the company to measure how efficiently the company is utilizing its resources. It shows the strength and weaknesses of the company in comparison to its counterparts.
On the higher side, it shows that the company is stable and will survive in case of an economic downturn as the company can afford to reduce prices. Whereas on the lower side, it shows the low creditworthiness and the inability of the company to fight the competition.
A declining gross income of the company shows that the cost of producing the goods is increasing faster than the price of selling or that the spoilage and stealing are reducing the inventory.
In all, the gross margin or gross profit shows the company’s actual worth.
Example of an Individual
Let us take an example. Assume an individual has a $70000 annual salary. The saving accounts generate $1500 a year as the interest. He receives $500 per year as a dividend from the company he owns stocks in. He also receives $12000 a year from the property on rent. His gross annual income will be $84000.
Example of Business
Let us assume a company in the catering business sold $1 million worth of food in the previous year. The cost of producing that food is $345000. Therefore, the gross income of the company will be $1 million minus $345000 = $655000.
Assume the gross revenue of an XYZ company is $1,200,000 and the expenses are:
Purchase of raw material= $140,000
Supply cost= $50,000
Equipment cost= $240,000
Cost of labor= $ 130,000
Cost of packaging= $100,000
Gross income =(1,200,000)-($140,000+$50,000+$240,000+$130,000+$100,000)
=$1,200,000- $660,000= $540,000
So the gross income of the company is $540,000
This concludes that the gross income has great significance, whether it is an individual or a business. The high amount of this income shows creditworthiness. The lenders or creditors can trust the individual to fulfill their obligations. The business gross profit or margin shows the efficiency of the company and also its ability to survive the challenges of the future.