What Is Gross Income? Examples And How to Calculate It!
Knowing gross income is important to the business accounting process because it specifically relates to the cost of goods sold. In other words, the data results can reflect company management’s effectiveness in purchasing inventory. It also helps companies allocate labour and make decisions about the location of factories for producing goods.
What Is Gross Income?
Essentially, it is the revenue from all sources minus the company’s cost of goods sold. Usually, it is also equated with gross margin; it’s just that it refers to monetary amounts. Meanwhile, gross margin is used when referring to a ratio or percentage.
So, gross income is the simplest measure of a company’s profitability. At the same time, metrics include direct costs used to produce goods or services and do not include other costs incurred for selling activities, taxes, administration, and other overall costs for running a business.
Factors Affecting
Income can be affected by several things.
1. Product selling price
The greater the income received if there is an increase in the price of the products sold, the higher the gross income. This is why the income received is always different each period because the selling price of products per period can be different.
2. Number of items
If the number of goods or services sold increases, there would be a greater chance of getting high income.
3. Cost of goods sold
COGS (Cost of Goods Sold) is fixed and balanced with the selling price; of course, the opportunity to get income will also be higher if the selling price gives a large profit.
Examples and How to Calculate It
So that you understand better, there are examples that you can pay attention to and how to calculate them. However, before that, first, know the following formula!
Gross income = Gross Revenue−COGS (Cost of Goods Sold)
Then move on to examples as well as how to calculate it.
Let’s assume that company X has total net sales of $80 billion in six months. Company X has incurred $35 billion in manufacturing costs and $6 billion in additional costs; this is still included in its cost of goods sold.
Based on the formula above, we can know that the result of this calculation is $39 billion in six months. To calculate it is by:
80 − (35 + 6 ) = 39
Keep in mind that when you do the calculations, you only need to calculate net sales and the cost of goods sold. Other expenses the company bears do not need to be calculated.
Costs for other expenses are included in the calculation of net income. Net income is the amount of income earned after deducting these costs.
Calculate it by subtracting all business costs from taxes, advertising, interest, and others. This is then supplemented by qualifying deductions such as operational and legal expenses.
By calculating gross income, the company will know how much profit and loss from the business it runs. So, a company or business person must do the calculations to find out.
