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Understanding the gross income of individuals and businesses

by Lee Mark

What is a gross profit?

A gross income refers to all the revenue that an individual gains from all aspects like wages, interest or rental income, dividends, and more before subtracting all other deductions and taxes.

The gross income is also known as gross profit for companies when they make financial statements. We are talking about aspects that may be about payment incurred from products and services sales, intellectual properties, investment capital gains, etc.

Why do we need to calculate a gross income?

It is common for lenders and creditors to require borrowers the gross income statement to discern whether they will lend or give advance credit. The same concept applies to real estate landlords’ relationships with their potential tenants to avoid payment problems. The government may also use the gross income as a base when determining how much tax an individual has to pay.

Tell me more about gross income.

An individual’s gross income is the total amount of money incurred before tax and any other deductions. A full-time employee’s annual salary without any deductions is the gross income. However, some people with full-time jobs also have other income sources like gigs or trading activity profits. These individuals may also receive stock dividends or rental income if they own a real estate property like apartment units for rent. We should also take into account these items in calculating a person’s gross income.

Let us cite an example that explains the gross income for individual

Let us say that Robbie is a city mayor and his annual wage is $24,000. Since he is a licensed architect, he also accepts design-and-build services, and for this year, he received a total of $5,000 for his professional fee. He also owns a 4-unit apartment building that generates $48,000 a year. The rent for one unit is $1,000 per month. ($1,000* 4units* 12months) He also opened a savings account that raises at least $1,000 per year. So, if we calculate Robbie’s gross income, it will be something like this:

Robbie’s annual gross income =$78,000

  • As a city mayor $24,000
  • As an architect $5,000
  • Apartments $48,000
  • Savings account $1,000

Let us cite an example that explains gross income businesses

A business or a company may prepare for a gross income for their financial statement. It is the difference between the sales of goods or services and the costs to produce the goods or services. In short, the equation of a business’s gross income is sales minus direct costs.

When we talk about direct costs, we refer to labor expenses, equipment, supply expenses, raw materials expenses, shipping fees, and many more involved in producing the good or service. We do not include taxes because it is not a direct cost. If we include tax and any other deductions, we can call it a net income and not a gross income.

For example, X Company is a company that sells high-quality furniture gained revenue of $800,000 this year. The costs directly involved in making this furniture, such as raw materials, labor, equipment, packaging, shipping, and supply costs, amount to $300,000. X Company’s gross for this year is $500,000 ($800,000-$300,000)

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