Gross income

Definition

Gross income refers to the total revenue generated by a company from its primary business activities before deducting any expenses.

What is gross income?

Gross income represents the amount of money earned from sales of goods or services without accounting for any costs associated with producing or delivering those goods or services.

Gross income is calculated by subtracting the cost of goods sold (COGS) from the total revenue. 

Gross Income = Total revenue – Cost of goods sold (COGS)

It serves as a key performance indicator (KPI) for evaluating the efficiency and profitability of a company’s operations. It provides insights into the company’s ability to generate revenue and covers the basic costs of production.

While gross income represents the revenue generated by a company, it does not reflect its overall profitability. To determine profitability, additional expenses such as operating expenses, interest, taxes, and depreciation must be deducted from gross income to calculate net income.

Gross income is crucial for budgeting and financial planning purposes. It helps companies forecast future revenue streams, set sales targets, and allocate resources effectively to maximise profitability.

Gross income vs. net income

Gross income and net income are key financial terms with distinct meanings. Gross income refers to the total revenue generated from sales or services before any expenses are deducted. It represents the top line of an income statement. Net income, on the other hand, is the profit remaining after all expenses, including operating costs, taxes, and interest, have been subtracted from the gross income. Net income is often referred to as the bottom line, indicating the company’s actual profitability.

Example of gross income

Company ABC, a retail clothing store, generates £1,000,000 in revenue from sales of clothing items over the course of a year. To acquire these clothing items for sale, Company ABC incurs £600,000 in costs.

Now we can calculate Company ABC’s gross income:

Gross income = £1,000,000 – £600,000 = £400,000

So, Company ABC’s gross income for the year is £400,000. This represents the total revenue generated from clothing sales before deducting any costs.