Gross Income

 

What is Gross Income?

Gross income is the total amount of money an entity earns before any deductions or taxes are taken out. It includes all sources of income. For instance:

Revenue from Sales of Goods and Services: This is the primary source of income for most entities, representing the income earned from the sale of products or services before any costs or expenses related to those sales are deducted.
Interest Income: This includes income earned from interest on investments, savings accounts, and other financial instruments where the entity has invested its money.
Dividend Income: Income received from dividends on shares of stock held in other entities.
Rental Income: For entities that own property and lease it out, the income received from tenants would be included in gross income.
Other Operating Revenues: This can include income from royalties, fees, and other revenue sources directly related to the entity primary operations.

Its important to note that while these are common components of gross income, the specific inclusions can vary depending on the nature of the entity

Essentially, Gross income is the full sum of revenue before any expenses are subtracted. Gross income is important because its used as a starting point for calculating taxable income and can also determine eligibility for financial services such as loans and credit cards.

According to AASB 101 Presentation of Financial Statements, the financial performance of a entity, including revenue and expenses, is presented in the income statement, indirectly contributing to the calculation of gross income.

Calculation of Gross Income

The formula for determining gross income involves subtracting the Cost of Goods Sold (COGS) from the entity gross revenue. Gross revenue represents the total sales generated by the entity before any deductions, while COGS includes the direct costs associated with producing or purchasing the goods sold.

The formula is as follows:

Gross Income = Gross Revenue – COGS 

Example: 

If an entity generates $300,000 in total sales during a specific period and incurs $150,000 as the cost of producing the goods sold, the gross income is calculated as follows:

Gross Revenue – COGS = Gross Income

$300,000 – $150,000 = $150,000

Therefore, the entitys gross income for that period amounts to $150,000. This figure provides valuable insights into the entity’s profitability and operational performance, serving as a basis for informed decision making and strategic planning.

As per AASB 102 Inventories, the standard outlines how to determine cost and its subsequent recognition as an expense, which includes writing down inventories to net realisable value. The standard specifies that inventories should be measured at the lower of cost and net realisable value, directly influencing the calculation of the cost of goods sold (COGS) and, consequently, the gross profit.

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.