Gross income refers to the total revenue generated from a business’s sales, whereas net income refers to the profit made by that revenue after expenses are considered. Here’s a little more insight into these two types of revenue. It also referred to as gross profit or gross margin – refers to the total amount of income that your business has generated over a specific period, minus the cost of goods sold (COGS). All other expenses are included in the gross income figure. To calculate the gross value, you can use the following formula:
Gross Income = Gross Revenue – COGS
How to Calculate Gross Income
The gross income of an individual is often a figure required by lenders when deciding whether or not to advance credit to an individual. The same applies to landlords when determining whether a potential tenant will be able to pay the rent on time. It is also the starting point when calculating taxes due to the government.
Assume that Suresh earns an annual income of 100,000 from his financial management consultancy work. Suresh also earns 70,000 in rental income from his real estate properties, 10,000 in dividends from shares he owns at Company XYZ, and 5,000 in interest income from his savings account. Suresh’s income can be calculated as follows:
Gross Income = 100,000 + 70,000 + 10,000 + 5,000 = 185,000
Net income, by contrast, refers to the actual profit made by the business after all additional expenses are factored in. In other words, it’s what’s leftover. Because COGS is already factored into gross income, you’ll need to subtract expenses like taxes, sales expenses, payroll for employees not directly involved in manufacturing, marketing, and business overheads. You can use this formula to calculate net income:
Net Income = Gross Income – Total Expenses
It’s important to recognize that these figures are telling you different things about your business.