Gross Earning

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 deducting the other expenses, taxes and the adjustments incurred by the company during that period.

Gross Earning Formula

The formula represents as follows:

Gross Earning = Total Revenue – Cost of Goods Sold

Where,

Example of Gross Earnings

Let’s discuss an example.

You can download this Gross Earning Excel Template here – Gross Earning Excel Template

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. Calculate the gross earnings of the company at the end of the accounting period ending on 31 December 2018.

Solution:

We calculate the gross earnings of the company 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:

Gross Earning Example 1
Cost of Goods Sold = Inventory at the Beginning of Accounting Year + Purchases made During Accounting Year – Inventory at the end of Accounting Year.

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 performance of the company for the accounting year and helps in making the inter-company and intra-company comparison of the performance.
  • The creditors, investors, use the gross earnings value of the company and other stakeholders of the company to measure and make an analysis that how efficiently and effectively the company is capable of converting the sales into income.
  • It is easy for the companies to calculate the gross earnings of the period 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 concerned period.

Disadvantages of Gross Earnings

The disadvantages are as follows:

Important Points

The different essential points are as follows:

Conclusion

The Gross Earning is the income generated by the company 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 make an analysis that how efficiently and effectively the company is capable of converting the sales into income. The gross earnings during an accounting period are reported on the statement of income of the company for that period.

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

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