Whether you are running your own business or working for someone else, some metrics are critical to understanding how you are doing financially. Net income and gross income are two numbers that can help you assess your business or personal finances. Different people and organizations may need to know your gross income – from your landlord to your accountant. You need to know your gross income when applying for a car loan, completing your tax return or taking out a mortgage.
Gross income refers to the total amount of revenue you or a company earns in a given year (less some specific expenditure). The net income, on the other hand, is the amount of the remaining income after all expenses have been taken into account. Before you make a plan for your budget, business, or investment, let’s take a closer look at these two important terms.
What is the gross income?
Gross income is the total amount of income that an individual or business has earned in a given period of time, usually one year. The gross income for individuals includes wages, salaries, pensions, interest, dividends and rental income. For companies, this means revenue from all sources – basically everything that is in the income statement.
How you calculate your gross income depends on whether you are talking about an individual or a company. When you run a business, your gross income helps you see how well the business is working. As an individual, you know exactly how much you earn.
How to calculate the gross income
The gross income is calculated equally for businesses and individuals: they add up the various amounts of money you have generated over the course of a year, less any costs or adjustments.
To calculate your gross income, add the income you have received to the money you have earned from real estate rentals, stock dividends and alimony payments or benefits received.
You may deduct certain amounts, such as the interest you pay on your student loans, and certain benefits, to obtain a value known as adjusted gross income (AGI) – the amount you are taxed on.
For entrepreneurs, the gross income is calculated by adding up any revenue the company has made directly from its sales or services. The costs of goods and raw materials and direct labor costs are deducted.
Use the following equation to calculate the gross income:
Sales – Cost of Goods Sales (COGS) = Gross Income
Gross income for businesses
Regardless of whether you sell a physical product or provide a service, your gross income is the same calculation and provides information about the financial state of your business. The number is often converted into a percentage, referred to as gross profit or gross margin.
When calculating your gross income, you deduct the specific costs directly associated with creating your product or providing your service – but not all of the costs. The raw material costs are deducted. However, overheads, including wages that are not directly related to the goods or services, will not be deducted.
Here is an example. A clothing company manufactures designer jeans for $ 110 per pair. They sell 5,000 pairs and make $ 550,000 in sales. If the denim they buy to make the jeans costs $ 45,000 and the tailor’s pay is $ 42,000, the company’s gross income can be calculated as follows:
$ 110,000 – ($ 45,000 – $ 42,000) = $ 463,000
Here is another example:
A plumber who runs his own business charges $ 50 an hour and works 80 hours a month, generating $ 4,000. Since he has no direct costs other than gasoline for his car ($ 120), his monthly gross profit is $ 3,880.
What is important is that direct labor costs, such as the wages of the people making the goods, should be deducted. However, this should not be rents, utility bills and administrative costs.
Gross income for one person
When calculating gross personal income, you should add up your wages (including any premiums and gratuities received) to income from real estate, shares, maintenance, pensions and taxable benefits. You can determine the taxable amount by deducting any amount above the line deductions like student loan interest.
It is worth noting that some sources of revenue are not taxed, such as: Insurance benefits, inheritances and gifts. While you do not need to consider this information when calculating your personal gross income for your tax return, you may do so in other circumstances, such as: For example, when you apply for a loan.
Here is an example. Jane works for a wildlife charity and her salary is $ 3,000 a month. She rents her guest room at Airbnb, earning her an additional $ 900 a month. It then deducts the interest on its student loan ($ 150), which is an off-balance deduction to earn a gross monthly income of $ 3,750.
(3000 USD + 900 USD) – 150 USD = 3750 USD.
What is the net income?
Net income, also known as net profit, is the remaining revenue after deducting expenses from total revenue. In other words, net income is the amount you earn after you have taken all your costs into account. Like the gross income, the net income for your personal finances or a business can be calculated.
Net income tells you how much you are going to take home after taking into account the expenditures required to earn the income. For example, you would deduct the cost of going to work, such as: For example, your gasoline or bus tariff. Other work related expenses, such as purchasing a uniform or paying income taxes, should be deducted to determine your net profit.
The net income of a business is the turnover of the business minus the costs. Subtract all expenses, including all staff taxes and salaries, to inventory purchases and utilities. By calculating the net income of a business, you can see how profitable it is. After deducting costs, you know how much the company actually earns. A company with a positive net profit makes profit. If the net income is negative, the company is operating at a loss. Knowing net income helps investors better understand how a business is developing. This is a key component for analyzing an inventory for purchase.
How to calculate the net income
To calculate your personal net income, subtract your expenses from your total revenue for the year.
Formula: Net income = Total income – Total expenditure
Let’s say Jennifer’s jewelery business had $ 50,000 in sales this quarter. With her business expenses including operating expenses, salaries, inventories and taxes of $ 20,000, her net income is $ 30,000.
Total Revenues (50,000 USD) – Total Revenues (20,000 USD) = Net Income (30,000 USD)
Jennifer’s jewelery company made a $ 30,000 profit this quarter, which she can reinvest in the business.
You can find the net income at the end of a profit and loss account, as shown in the following example. The expenses are divided into categories such as operating costs and taxes.
Net income for a company
The net income is usually easy to find in a financial statement and an important factor in the investment decision. Compare the net income with the competitors’ companies and other factors such as the P / E ratio and the ratio of debt to equity to see if you should invest.
Check your operating costs and strive for the highest possible profit margin to achieve a solid net income for your business. If you can reduce costs such as staff costs for the same gross income, your profit margin is higher.
Net income can also help you to calculate the price-earnings ratio of a company – which is helpful to investors. The price-earnings ratio (P / E) measures the current share price of a company with earnings per share. Generally, a high P / E ratio means that investors expect higher growth in the future. If a company does not have a P / E, it loses money.
Net income for one person
Personal net income refers to the income you have left after deducting work-related costs such as health insurance premiums, taxes, and pre-tax retirement contributions. Your annual net income is the amount you take home the year after deducting the costs associated with making that money.
It is important to be aware of this Deductions for which you may be entitled in preparing your taxes, such as travel and office expenses. Understanding your net income can help you determine where and how to spend your money, such as: B. in the estate planning and 401k investment, For example, it might be more beneficial for you to provide money to a business 401 (k) before taxes than to provide money to a business after tax IRA,
Your gross and net income can affect your taxes and other financial decisions, such as your investment. The gross and net income of a company provides information about its profitability and gives you important information about whether you should invest. Total with a budget and a investment plan Make sure you make the most of your hard earned cash.