Table of Contents
- What is Gross Income?
- Gross Income Calculation Formula
- Why Calculate Gross Income?
- Gross Income vs Revenue and Gross Profit
What is Gross Income?
Gross income is the total of all receipts (money, assets, services) that an organization receives before any expenses are deducted. It is a comprehensive indicator that can include various sources of income. For example, a furniture factory may not only produce tables and chairs but also rent out its premises and earn interest from funds deposited in a bank. All these receipts constitute the gross income of the enterprise.
Gross Income Calculation Formula
The formula for calculating gross income is as follows:
Gross Income = price per unit x quantity of goods sold
Let's consider an example with a toy store that also rents part of its space for a craft card stand. Over the week, the store sold 15 stuffed bears at a price of 300 rubles each, 12 Rubik's cubes at 100 rubles each, and earned 430 rubles per day from the stand. Let's calculate the gross income over 7 days:
- 300 rubles x 15 = 4500 rubles (bears)
- 100 rubles x 12 = 1200 rubles (Rubik's cubes)
- 430 rubles x 7 = 3010 rubles (stand)
Thus, the gross income amounted to: 4500 + 1200 + 3010 = 8710 rubles.
Why Calculate Gross Income?
Gross income is an important indicator for an organization, although it is not always reported in financial statements. Its calculation allows assessing business development and efficiency. By analyzing gross income over several months or years, one can identify the overall business dynamics. A graph of gross income can show how revenues change: whether they are increasing, remaining stable, or declining.
Status of the Graph and Possible Interpretations
- The graph is flat or slowly rising: income is coming in evenly, the business is stable. It is recommended to compare with other indicators.
- The graph has sharply increased: there may be a new effective source of income or significant changes within or outside the company. It is necessary to investigate the reasons.
- The graph is going down: there may be problems in the business, and it is important to search for reasons and take action.
Gross Income vs Revenue and Gross Profit
Gross income is often confused with other economic indicators such as revenue and gross profit. Unlike gross income, both of these indicators appear in financial reports.
Revenue represents the income generated by the organization from its primary activities, which is defined by the owner when registering the business. For example, an English language school may sell merchandise and organize excursions in addition to lessons, but revenue will be considered only from the lessons.
It is important to monitor the difference between gross income and revenue. If the revenue is significantly lower than the gross income, it may indicate that the organization is obtaining a large portion of its funds from ancillary activities, which may require changes in business processes or strategies.
Gross profit is defined as the difference between revenue and the cost of goods sold. Unlike gross income, this indicator takes into account the costs of producing goods. For example, if more was spent on creating goods than was earned, it means that production is unprofitable despite a high gross income.