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:
- 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 costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc. 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. Calculate the gross earnings of the company at the end of the accounting period ending on 31 December 2018.
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:
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:
- The calculation of gross earning does not help in measuring the total profitability of the companyProfitability Of The CompanyProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.. 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..
- To calculate the gross earnings, we use the inventory figures of the company. There are chances that the figures of the inventory 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. for the valuation of the inventory 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. will be overstated in the company’s books of accounts.
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 taxable income of the company 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. from the gross earnings. Thus, the value of the gross earnings will never be less than the value of the net income of the company.
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 –