What does gross income mean?

Sarah Hiraki

 · June 09, 2020  · 06/09/2020

What is gross income? Gross income is an individual’s total earnings before taxes and other deductions. For individuals, gross income is the total of their paycheck or wages, from any and all sources including pension and interest, pre-tax.

Gross income in business

Gross income in business is gross revenue, minus direct costs. In business, gross income is the simplest measure of a company’s profitability, as it includes direct costs (also known as cost of goods sold, or COGS) but does not include other costs your business may incur. Gross income is sometimes referred to as gross margin. There is also gross profit margin (which is defined as a percentage) – so be sure you’re looking at the right figure, if you’re just getting started.

Gross income often appears on a company’s income statement – it’s often referred to as the “top line.” Net income, in comparison, is similar – but takes into account any additional fees and expenses, such as taxes, interest and advertising.

How to calculate gross income

Gross Income = Gross Revenue − Direct Costs

A simple equation, but the thing that can be tricky here is that people often describe the terms in this formula using different words for the same ideas.

For instance, revenue is often called total sales or turnover, and direct costs are commonly known as the cost of sales or the cost of goods sold (COGS), especially for businesses that make or resell products.

How is gross income used?

Companies might be interested in their gross income because it’s a simple snapshot of how profitable a company is. This figure is converted into gross profit margin – a metric, represented as a percentage of the businesses income, typically over the course of a year. In simplest terms, gross income lets you know how much you have, whereas gross profit margin can give you an indicator of how profitable you are. Remember, gross income excludes costs related to advertising, taxes, and administrative costs – so it may be very different from the number you can expect to see in your account at the end of a term.

Gross income is just one figure in a suite of many that can inform your business decisions and help you to set yourself up for success. Read about other useful terms – like EBIT, gross profit, and net profit.

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