What is Gross Earning?

Gross earnings of the company refer to the amount left over out of the total revenue generated by the company from the sale of its goods during a particular accounting period after deducting the cost of the goods sold but before removing the other expenses, taxes, and the adjustments incurred by the company during that period.

Gross Earning Formula

The formula represents as follows:

Where,

  • Total Revenue = Income which any business entity generates by selling their different goods in the market or by providing their services to its customers during the normal course of the company’s operations.Cost of Goods Sold = COGS is the sum of all direct costsDirect CostsDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more related to the production of different types of the goods sold by the company and includes the cost of the raw material, cost of the direct labor and cost incurred on the other direct expenses.

Example of Gross Earnings

Let’s discuss an example.

Company A ltd. has the details of the following transactions incurred during the accounting period ending on 31 December 2018.

The company earned a total revenue of $ 1,000,000 during the accounting period ending on 31 December 2018. On 1 January 2018, the company had an entire inventory of $ 200,000, and on 31 December 2018, the total value of its inventory was $ 300,000. Apart from this, the company made the total purchases worth $ 800,000 during the accounting period under consideration. Therefore, calculate the company’s gross earnings at the end of the accounting period ending 31 December 2018.

Solution:

We calculate the company’s gross earnings by subtracting the total value of the cost of goods sold during the period from the total value of the revenue generated during that period.

In the present case, to calculate the gross earnings of the company at the end of the accounting period ending on 31 December 2018, firstly, the total value of the cost of goods sold will be calculated as follows:

Cost of Goods Sold = $ 200,000 + $ 800,000 – $ 300,000 = $ 700,000

Now the gross earnings of the company for the accounting period ending on 31 December 2018 will be calculated using the below formula:

Gross Earning = Total Revenue – Cost of Goods Sold = $ 1,000,000– $ 700,000 = $ 300,000

Thus in the present case, the Gross earnings of the company A ltd. for the year ending on 31 December 2018 is $ 300,000.

Advantages of Gross Earnings

The different advantages are as follows:

  • It shows the company’s performance for the accounting year and helps make the inter-company and intra-company comparison of the performance.The creditors, and investors, use the gross earnings value of the company and other stakeholders of the company to measure and make an analysis of how efficiently and effectively the company is capable of converting the sales into income.It is easy for the companies to calculate the period’s gross earnings as it is calculated simply by deducting the cost of the goods sold value from the value of the total revenue generated by the company during the period.

Disadvantages of Gross Earnings

The disadvantages are as follows:

  • The calculation of gross earnings does not help in measuring the company’s total profitability. To calculate the total profitability, we subtract all the direct and indirect costs from the revenue generated in the accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more.To calculate the gross earnings, we use the inventory figures of the company. There are chances that the inventory figures are potentially inaccurate as accountants responsibleAccountants ResponsibleResponsibilities of an accountant include documenting accounting information so as to ensure that public trust and interest of all the related stakeholders are preserved. read more for the inventory valuation might not have considered the adjustments in the inventory for the lost, damaged, or stolen value of the inventory. In that case, the value of the ending inventoryThe Value Of The Ending InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more will be overstated in the company’s books of accounts.

Important Points

The different essential points are as follows:

  • The company reports the gross earnings generated during an accounting period on the statement of income for that period.The gross earnings in the case of an individual will be the total income earned for a period before making any adjustments or deduction/taxation on the income.It is calculated by subtracting the total value of goods sold during a period from the total value of the revenue generated by the company during that period.It is different from the company’s taxable income, where the net income is calculated by deducting the indirect expensesIndirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.read more from the gross earnings. Thus, the value of the gross earnings will never be less than the value of the company’s net income.

Conclusion

The Gross Earning is the income the company generates after deducting the sum of the cost of the goods sold during a period from the total value of the revenue generated during the same period. It shows the performance of the company for the accounting year and the creditors, investors, and other stakeholders of the company to measure and analyze how efficiently and effectively the company can convert sales into income. The gross earnings during an accounting period are reported on the company’s statement of income for that period.

This article has been a guide to gross earning and its meaning. Here we discuss the formula to calculate gross earnings along with an example, advantages, and disadvantages. You can learn more about investment from the following articles –

  • Gross LeaseGross IncomeFormula of Retained EarningsWhat is Pro-Forma Earnings?