What is Gross Income? Explanation with Examples

Gross income is the total income of an individual before any deductions. This income is also called as Gross pay and it’s the total amount an individual receives from his or her employer before any kind of deductions. This concept is normally used for individuals. As for companies, we use the concept of Gross Profit or Gross margin.

For example, suppose Mr. Jack received total salary of $5,500 in his bank account. He is curious about what is his gross income. Keep in mind that the income received in bank account is always net income. (Taxes etc. are already deducted from this figure). You just need to find out the total deductions. After you’ve sorted that, add all those deductions to the salary $5,500 and you’ll get your answer in gross figure Suppose income tax deductions are $500, other minor deductions amounted to $300.

Net Salary$5,500
Add: Deductions 
Income Tax$500               
Other deductions$300
Gross Salary$6,300
Example

As you know, many of us are not receiving income from salary only. Some of us has invested in property while some of us has invested in stock and is receiving dividend. Some of us are also receiving pensions. To sum it up, Gross income is the income received from all sources of income before any kind of deductions.

Gross Income Definition

The definition of gross income is different for individuals and for companies.

For individuals “Income received from all sources such as salary, investments, pensions, rental income, alimony etc. before any deductions i.e. income Tax, property tax etc. is called gross income”

For companies, gross income or gross profit can be defined as “total sales less cost of goods sold (COGS)”. This cost of goods sold contains directly attributable costs i.e. direct material, direct labor and other factory overheads. It does not contain operating expenses such as admin expenses and selling expenses.

For example, suppose total sales of ABC Ltd were $450,000 for the month of November 2020. Costs of Goods sold were $200,000. What will be the gross margin or gross profit?

Total Sales$450,000
Less: Cost of Goods Sold$200,000
Gross Profit$250,000
Example

Gross Monthly Income

The amount of income you earn in one month before any deductions are made from it. It’s the income from all sources in a single month. Remember that as we discussed already, gross figure is exclusive of any kind of deductions.

For example, Machelle earned the following incomes in the month of October 2020;

  • Income from salary (Net) = $5,000
  • Rental income (Net) = $3,000
  • Dividends (Net) = $1,000

What will be the gross monthly income if all the deductions amounted to $1200?

Solution:

Income from salary$5,000
Rental income$3,000
Dividends (Net)$1,000
Add: Deductions$1200
total gross monthly income$10,200
Example
Definition of Gross Monthly Income

Annual Gross Income

The amount of income you earn in one whole year before any deductions are made from it. It’s the income from all sources for the whole year. As mentioned before, this gross figure is exclusive of any kind of deductions.

Suppose you’re given the following data of Michael for the year 2020;

  • Monthly Income from salary (Net) = $5,000
  • Monthly Rental income (Net) = $3,000
  • Dividends (Net) = $1,000

What will be the annual gross income if all the deductions amounted to $10,000?

Solution:

Income from salary (5,000*12)$60,000
Rental income (3,000*12)$36,000
Dividends (Net)$1,000
Add: Deductions$10,000
total gross annual income$107,000
Example

What is adjusted Gross Income?

Adjusted gross income as the name suggests is the gross income after making some specific deductions.

This income is used to determine how much of your income is taxable. AGI is used as an acronym for adjusted gross income.

It is important to understand the concept behind this term and understand how it is used before we proceed any further. Adjusted gross income is simply gross income minus all the specific or above the line deductions

In order to learn more about gross income, it is best to consult a financial advisor or tax professional. You can also find a wealth of information online. For example, you can consult websites which offer free income tax calculators. Sacred Accounting also has a lot of information, you can use the search feature to search for relevant information. That said, the website will also provide you with income tax information on a state by state basis. If you know how much gross income you earn each year, then you can easily calculate your net income and find out what your tax liability is as well.

FAQs

What does gross income mean?

Gross income simply means the income before any kind of deductions. Deductions are normally in the form of income tax etc.

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What is Gross Income? Explanation with Examples
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What is Gross Income? Explanation with Examples
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Income received from all sources such as salary, investments, pensions, rental income, alimony etc. before any deductions i.e. income Tax, property tax etc. is called gross income.
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Sacred Accounting
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