All businesses look to make a profit, and individuals look to maximize their salary. However, expenses generate. The question therefore arises: how can one decide on how much they are earning? Gross annual income refers to the total income that an individual earns annually before taxes and other deductions. It refers to income collected from all sources that include. But is not limited to annual salaries, income from rents, income from interests and dividends.
In the case of business entities, gross income, also known as gross profit, refers to the total revenue that a company earns minus the cost of goods sold. Gross profit or gross income is a piece of essential information for companies when preparing financial statements and especially the profit and loss account. The revenue of the company may arise from the money gained by selling goods and services, income from rent, income from intellectual property such as patents and copyrights. Whereas the cost of goods sold deals with the cost required to manufacture a product or provide a service.
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What Your Gross Annual Income Means?
Gross Income vs. Net Income
Although they go hand in hand, gross income and net income differ from each other by quite a margin, especially in the business sector. As stated, gross income is concerned with all income that is gained by a company or individual before the deduction of taxes and other payable amounts. On the other hand, net income, or net profit, of a company refers to the profit that a company makes after subtracting all expenses from the gross income.
This includes all expenses of the company such as taxes, advertisements, interests, legal fees, etc. A positive net income refers to a profit by the company. Whereas a negative net income means that the company is working at a loss. On a more individual level, net annual income is the income earned by the individual after subtracting federal taxes, state taxes, social security taxes, health, and other insurances.
Why Your Gross Income Matters
Gross annual income matters for individuals and companies for several reasons and the most significant being for taxation purposes and investment. To understand why gross annual income is important, we must first take a look at how taxable income is calculated. At first, the gross annual income is going through a series of adjustments such as that for professional or health expenses.
This gives the Adjusted Gross Income or AGI. The AGI is further adjusted with tax exemptions and deductions to produce the taxable income. Thus, the gross annual income is an integral part of the intricate calculations required to find the taxable income of an individual.
The AGI calculated is useful for individuals for other reasons too. It is used to determine the eligibility of credits such as income credit, child tax credit and earned income credits as also makes an individual eligible for several deductions. This lowers the tax payable to the government and saves more money for the individual.
Gross annual income is also important for making investments and the reception of loans. For example, in the case of mortgages, knowing the gross annual income helps the lender make decisions on whether to allow the mortgage or not. This is significant, as a lender is more concerned with the total amount earned over a year. Without regard for any expenses or taxes incurred.
In short, the gross annual income of individuals tells lenders whether they will be able to advance credit on time. Landlords whether tenants will be able to pay rent on time and government agencies for determining taxes.
Similarly, for businesses and companies, gross annual income allows an investor to decide whether to invest in a business and if so, how much. The gross profit margin of the business, which is calculated from the company’s gross annual income, allows the investor to assess the risk of investing in the company.
The Mathematics: How Gross Income is Calculated
For an individual, gross annual income is the amount of money that the individual earns in a year without any taxes or other expenses deducted. This means that the gross annual income of an individual is calculated based on his or her annual salary. However, this also includes any other sources of income the individual may have such as rent, interests or dividends.
For example, let’s assume a person works in the finance sector of a tech company and also owns shares of the company. He also has real estate properties and a savings account which accumulates interest over the years. If his annual salary is $80,000, his annual rental income is $20,000. And he earns a total of $15,000 from dividends of his shares and his bank interests every year, his total gross income would be as follows:
Gross Annual Income = $80,000+$20,000+$15,000 = $115,000
As stated beforehand, for a business, the gross income differs widely from that of an individual. To calculate the gross income of a company, the company must first calculate the total revenues earned by the company from various sources such as sales and rent, and deduct any expenses incurred due to the manufacturing of the product or provision of the service. This may include the cost of raw materials, labor costs and the cost of equipment that is used in the manufacturing process. In other words, for a business, the gross annual income can be calculated by subtracting the cost of goods sold from the gross annual revenue of the company.
For example, a company that produces perfumes makes total revenue of $1,500,000 in a year. However, the chemicals, fragrances and other raw materials cost them $200,000 that year. The company also spent another $200,000 each on equipment and human resources, and the cost of packaging and shipping was $100,000. Subtracting the various direct costs from the gross revenue:
Gross Annual Income = $1,500,000 – $200,000 – $200,000 – $200,000 – $100,000 = $800,000
In conclusion, gross annual income plays an important role for both individuals and companies. It is the basis through which the value of an individual or company is decided, and therefore must be taken into consideration more carefully than it usually is.