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How to compute your business income

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How to compute your business income

Every person or organization engaging in business activities has the goal of earning income or profit. They provide products and/or services in exchange for a price that will gain them some sort of profit.

The existence and continuity of every business relies heavily on how well a person or company sells their products and/or services — and also how good they manage and minimize business expenses. These two factors cause the business either to earn profit or incur losses.

It’s a common mistake to think that the business is earning money if there is a sale. However, the real test of good business performance lies on business income.

To determine if the business is profiting or losing money, you need to learn how to compute your business income.

Most businesses leave the job of computing their business income to their accountants. It is a practical move because accountants are technically competent to do the job. However, it is crucial that a businessperson understand the factors in computing business income so that they can better interpret and manage the financial result of the business operation. Furthermore, it can help the business determine which product or service is earning or incurring losses. As such, they can decide which product or service they should continue to sell and which to stop selling.

In this article, I hope to share with you my knowledge in accounting to help you better manage your own business finances. You will discover tools that will help you to compute your business income and learn the factors which can help you interpret the numbers shown in an income report.

Business Income Computation

Generally, business income is computed as follows:

Business Income = Revenue – Expense

Business income is the amount of gain (in monetary value or in kind) earned from a sale of a service and/or product after deducting all incidental expenses incurred by the business.

Revenue is the amount of money received (or to be received) in exchange for the product and/or services provided and sold. Revenue includes gross receipts on sale of service — or gross sales on sale of product. For each sale of a product or service, the amount of revenue increases. Meanwhile, sales discounts and allowances given to buyers or customers for bulk orders or special promos decrease the amount of revenue. Sample sales of products includes the sale of grocery items, bags, shoes, clothes, software, electronic gadgets, books, etc. On the other hand, the sale of a service includes service fees earned from transportation, communication and sale of professional skills like freelance writing, virtual assisting, accounting, legal advice, doctor, etc.

Expense is the amount of money paid (or to be paid) in exchange for product and/or service received and purchased. Sample expenses include inventory purchases, salary and wages, transportation, advertising, electric and water bills, communication, professional fees, etc.

3 Easy Steps in Computing Business Income

  1. Identify all the products and/or services sold in a given period and then total the amount. The total represents your revenue.
  2. Identify all the costs you pay in order to operate your business in the same given period. The total represents your total expenses.
  3. To compute your business income, subtract your total expenses against your total revenue.

Sample Illustration and Computation

John Doe is a software developer who owns a Software Company which focuses on developing and selling online software. Additionally, he has a number of blogs that promotes other people’s products and in return, he earns commission income. (Note that the period we want to compute is for the whole year of 2011.)

Step 1 – During 2011, Joe’s revenue was as follows:

Sale of Software $200,000
Commission on sales of other people’s product 40,000
Total Revenue $240,000

Step 2 – The cost in operating Joe’s Software Company during 2011 includes the following:

Web Hosting Expenses $2,400
Domain Fees 10
Salaries Paid 60,000
Rental and Utilities Expenses 10,000
Total Expenses $72,410

Step 3 – Joe’s business income in 2011 is $167590, computed as follows:

Business Income = Total Revenue – Total Expenses
= $240,000 – $72,410
= $167,590

Based on computed business income for 2011, Joe’s Software Company is showing a good performance since the total revenue is greater than the total expenses.

Conclusion – Interpreting Business Income

1. If Revenue > Expense = Income/Profit.

When the amount of revenue earned is greater than the expenses incurred, it can mean the business operation is doing well because there is enough amount of money to pay all the business expenses. Also, it is an indicator of good business management.

2. If Revenue Share

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  • How to Calculate Taxable Income for your Business

    Posted by thallissey on Mar 21, 2018 10:00:00 AM

    How to compute your business incomeA business’ taxable income is the portion of its profits that are subject to Federal and State income tax. This can be calculated by subtracting permissible tax deductions from gross sales. It’s an important figure to know, because it helps you determine how much of your business’ profits you will ultimately be able to keep.

    This basic calculation is easy to perform if you follow these five simple steps.

    5 Steps to Assessing your Taxable Income

    Although there are many reasons your business might need an accountant, taxable income is a calculation you can probably do on your own.

    What you need

    • Financial statements
    • Tax records
    • Government tax tables
    • Computer spreadsheet program

    How to compute your business income

    1) Determine Gross Sales

    Your business’ financial statements will help you determine important facts and figures, such as gross sales. Gross sales is simply determined by the sum of revenue from all sources during the year minus the sum of all expenses. This figure is calculated in the same way regardless of your type of business or revenue stream.

    2) Calculate Cost of Goods Sold

    Depending what you do, you may or may not need to calculate the cost of goods sold. If you are in retail, you probably bought inventory from a wholesaler. You would then subtract this amount from your overall revenue to determine gross profit for tax purposes. If you do not sell goods, you can ignore this step.

    3) Itemize Business Expenses

    In order to figure out how much of your income is taxable, you will also want to tally and categorize your business expenses, which will include items, such as:

    • Salaries and wages
    • Rent
    • Repairs and maintenance

    Subtract your business expenses from your gross profit to determine your gross income.

    How to compute your business income

    4) Subtract Deductions

    Now that you have a good idea of your business’ yearly income, take that number and subtract all the deductions and credits your company is eligible for, including:

    • Business interest
    • Retirement plans
    • Business use of a car

    5) Determine Taxable Income

    You company’s taxable income is not the same as its net income. The portion of your income that is taxable is your gross income minus any allowable tax deductions or credits. The final number could be negative if your company has shown an overall loss in the profit column.

    Learning how much of your income is taxable is a good first step toward preparing your business’ tax return. If you have any questions or need additional assistance before the April 17 deadline, consult a local tax professional.

    Do matters related to taxation make you see stars in broad daylight? Well, fret not. Every start-up/ small business owner goes through a period of heightened ‘confusion’ regarding tax matters when he starts off as an entrepreneur.

    In the article below, we give you a basic guide on how you should compute your business income and what all expenditures are allowed to be deducted from the revenue that you earn or will earn in the course of your business. Note: This article aspires to serve only as a guide and as such, does not have an exhaustive list of items of expenditure that are allowed to be deducted in order to arrive at the business income for a particular assessment year.

    Expenditure for Premises Used:

    Any amount spent towards rent for the premises used, repairs undertaken, any taxes/rates paid to municipal corporations and premium paid in respect of insurance against risk of damage or destruction of the premises.

    Repairs & Insurance of Machinery/ Furniture:

    Amount spent towards current repairs of machinery or furniture and insurance premium paid in respect of insurance against risk of damage or destruction thereof.

    Depreciation:

    Depreciation provided for tangible assets like premises, furniture, vehicle used for business, etc and non-tangible assets like know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature.

    Preliminary Expenses:

    Expenditure in connection with preparation of feasibility report, project report, conducting market survey or any other survey necessary for the business and engineering services relating to the business.

    Premium for Stocks/Stores:

    The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession

    Interest on Loans: The amount of the interest paid in respect of capital borrowed for the purposes of the business

    Payment for Provident Fund/Gratuity:

    Any sum paid by way of contribution towards a recognised provident fund or an approved superannuation fund and an approved gratuity fund

    Bad Debts: The amount of any bad debt or part thereof which is written off as irrecoverable in the accounts for the previous assessment year

    General: Any expenditure, not being in the nature of capital expenditure or personal expenses, laid out or expended wholly and exclusively for the purposes of the business including salary of staff, bills for the use of electricity, telephone, internet used for business purposes.

    Written by: PeopleKeep Team
    September 22, 2020 at 8:05 AM

    The Affordable Care Act (ACA) offers premium tax credits to help eligible individuals and families purchase individual health insurance coverage through the Health Insurance Marketplace. In 2021, these tax credits require lower income households to pay between 2.07-9.83% of their household income for the second lowest cost silver plan available in their region. The tax credits will cover the rest. The “household income” figure here is your modified adjusted gross income (MAGI).

    Your MAGI is a measure used by the IRS to determine if you are eligible to use certain deductions, credits (including premium tax credits), or retirement plans. The percentage of income you must pay for individual health insurance depends on how close you are to the federal poverty line (FPL) based on modified adjusted gross income, not adjusted gross income (AGI). People whose modified gross income is less than 400% of the FPL are eligible for a premium tax credit Here’s a quick overview of how to calculate your modified adjusted gross income.

    Note: Premium tax credits work with the qualified small employer health reimbursement arrangement (QSEHRA), but you must report your HRA allowance amount to avoid tax penalties. They do not work with an individual coverage HRA (ICHRA). If your employer offers you an ICHRA allowance that allows you to purchase a plan that meets affordability criteria on the ACA marketplace or your state exchange, you lose your premium tax credits—even if you opt out of the ICHRA.

    Step 1. Calculating your gross income

    Your gross income (GI) is the money you earned through wages/salary, interests, dividends, rental and royalty income, capital gains, business income, farm income, unemployment, and alimony received. This is the basis for your AGI calculation. This figure is located on line 7b of IRS form 1040.

    Step 2. Calculating your adjusted gross income

    Once you have gross income, you “adjust” it to calculate your AGI by subtracting qualified deductions from your gross income.

    Adjustments can include items like some contributions to IRAs, moving expenses, alimony paid, self-employment taxes, and student loan interest. There are many free AGI calculators available online, like this one from CNN Money. This figure is located on line 8b of IRS form 1040.

    Step 3. Calculate Your Modified Adjusted Gross Income

    The IRS phases out credits (including premium tax credits) and deductions as your income increases. By adding these factors back to your AGI, the IRS determines how much you really earned.

    According to Internal Revenue Code ((d)(2)(B)), you should add the following to your AGI to determine your MAGI:

    • Any amount excluded from gross income in section 911 (Foreign earned income and housing costs for qualified individuals)
    • Any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax
    • Any amount equal to the portion of the taxpayer’s social security benefits (as defined in Section 86 (d)) which is not included in gross income under section 86 for the taxable year. (Any amount received by the taxpayer by reason of entitlement to a monthly benefit under title II of the Social Security Act, or a tier 1 railroad retirement benefit.)

    Most people don’t have any of the income just described so their MAGI is the same as their AGI.

    Once you know your MAGI, you can shop the ACA marketplace or your state exchange for plans. These sites will ask for your MAGI and household size, then calculate tax credits for you. There are also online premium tax credit calculators, like this one from the Kaiser Family Foundation that can help you estimate your tax credit ahead of time. Massachusetts, Vermont, and California also have additional state-funded subsidies for qualified families.

    Incoming revenue is vital to business growth, but it doesn’t paint the most accurate financial picture of your business. You must know whether your company is profiting after deducting business expenses. You need to determine your business’s net income.

    Calculating your business’s net income helps you determine your business’s profitability, decide whether to expand or reduce operations, plan budgets, and relay information to investors.

    Learn what net income is, how to calculate net income, and which financial statement to record your company’s net income on.

    What is net income?

    Net income is your company’s total profits after deducting business expenses. You might hear net income referred to as net earnings, net profit, or your company’s bottom line.

    Net income can be either positive or negative. If you have more revenues than expenses, you will have a positive net income. If your expenses outweigh your revenues, you will have a negative net income, which is known as a net loss.

    Types of business expenses you might have include operating expenses, payroll costs, rent, utilities, taxes, interest, certain dividends, etc.

    You can find yearly, quarterly, or monthly net income. Use a time frame that works for your business.

    To find your company’s net income, you need to know your business’s gross income and expenses for the period.

    Net income vs. gross income

    So, what is gross income? Unlike net income, gross income (also called gross profit) is how much your business has before deducting expenses. Use gross income to find your net income.

    To find gross income, you need to know your business’s total revenue and cost of goods sold. Your business’s gross income is the revenue you have after subtracting your cost of goods sold (COGS). COGS is how much it costs you to make a product or perform a service.

    Gross income is how much money your business has after deducting the cost of goods sold from total revenue.

    Net income is how much money your business has after deducting expenses from gross income.

    How do you find net income?

    You can calculate net income by subtracting the cost of goods sold and expenses from your business’s total revenue.

    Before calculating net income, you need to understand the gross income formula:

    Gross Income = Revenue – Cost of Goods Sold

    Now, take a look at the net income formula:

    Net Income = Gross Income – Expenses

    Or, you can use the following formula to calculate net income:

    Net Income = Revenue – Cost of Goods Sold – Expenses

    How to compute your business income

    Example

    Let’s say you want to find your company’s net income for the month of March. Here are the facts:

    • Total revenues: $30,000
    • Cost of goods sold: $12,000
    • Expenses:
      • Rent: $2,000
      • Utilities: $400
      • Purchases: $1,000
      • Payroll: $3,000
      • Taxes: $800

    First, you want to find your business’s gross income. Subtract the cost of goods sold from your total revenue.

    Gross Income = $30,000 – $12,000

    Gross Income = $18,000

    Next, tally up your total expenses for the month (not including the cost of goods sold). After adding rent, utility, purchase, payroll, and tax expenses, your expenses total $7,200. Now, subtract your total expenses from your gross income to find your net income.

    Net Income = $18,000 – $7,200

    Net Income = $10,800

    Your net income for the period is $10,800.

    Where to record net income

    Record net income on your business’s income statement. The income statement is one of three main financial statements companies use.

    An income statement shows you the profitability of your company. It reports your business’s profits and losses over a specific period. Income statements show the process of determining net income.

    Total revenues, cost of goods sold, gross income, expenses, taxes, and net income are all line items on the income statement. Net income is the final line of the statement, which is why it is also called the bottom line.

    Here is a sample income statement:

    How to compute your business income

    Ready to take control of your business’s finances? With Patriot’s online accounting software, you can easily track expenses and income. Plus, you can record payments, create invoices, and track unpaid invoices to help you better stay organized. Get your free trial today!

    This article has been updated from its original publication date of 02/06/2015.

    This is not intended as legal advice; for more information, please click here.

    Calculating Profit Margin

    Calculating a business’s income is essentially deducting the costs and expenses from its profits. The Securities and Exchange Commission recommends that you think of it as a set of stairs, where you start at the top with the total amount of sales made during the accounting period, and with each step down you make a deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how much the company earned or lost during the accounting period. Most accounting software, such as QuickBooks, calculates the business income automatically based on the information you enter throughout the accounting period.

    Add together the money brought in from sales or services. Only include revenue that the business has earned and received, not income that is expected or accounts receivable. The result is the company’s gross revenue.

    Calculate the money that the company does not expect to collect, returns and allowances. This could be from accounts unsuccessfully recovered through collection, returns or refunds.

    Sum up the various kinds of inventory and operating expenses. This includes the cost of goods sold, salaries and overhead. Do not include the cost of inventory that has yet to be sold.

    Calculate asset depreciation. If the business has assets such as machinery, tools and furniture that will be used for a long period of time, it can spread its costs over the life of the asset. There are several methods for calculating depreciation, such as straight-line and expedited. Discuss with an accountant the best method to use for your business’ specific circumstances.

    Add up the company’s expenses with the additional expenses. The result of these two numbers is the company’s total expenses.

    Total the amounts computed for Steps 2, 3, 4 and 5 to come up with the total expenses.

    Subtract the company’s total expenses from the gross revenue. This final number is the company’s net income, or business income.

    Beware Coinsurance Penalties

    How to compute your business income

    Peopleimages/Digital Vision/Getty Images

    If you are a business owner who has decided to purchase business income coverage, you will likely face a dilemma. What limit of insurance should you buy? Answering this question can be tricky as it requires some complex calculations.

    Projections Required

    Business income losses are calculated based on the amount of income your company actually loses during the time your business is shut down. The most your insurer will pay for a loss is the business income limit of insurance. To choose an adequate the limit, you must make the following two projections:

    1. The amount of income your company is expected to generate over the next twelve months. Your business income limit is calculated based on your estimate of future revenue.
    2. The amount of time you will need to repair damaged property after a physical loss. That is, if your business is forced to shut down because property has been damaged, how much time will you need to make repairs and get your business up and running again? In business income insurance, this time period is called the period of restoration.

    These projections aren’t easy to make. Both are essential for determining the right amount of coverage for your company.

    Understanding the Meaning of Business Income

    One of the first challenges in choosing a business income limit is understanding the meaning of business income. Under many business income forms (including the standard ISO forms), this term means the sum of the following:

    1. Net income, meaning net profit or loss before income taxes
    2. Normal operating expenses that continue after a loss. This includes payroll.

    If your business earns income by renting property to others, you can either include or exclude your rental income in your calculation of business income. When rental value is excluded in the calculation, no coverage will be provided for a loss of rental income. If your company generates all of its income from rental properties, your business income will consist of rental income only.

    Calculating Your Business Income

    The most accurate way to project your 12-month income is to use a business income worksheet. You can use the standard ISO worksheet or one prepared by your insurer. If you need a worksheet, ask your agent or broker to obtain one for you.

    The worksheet outlines a step-by-step process for calculating your business income exposure. The first step is to determine how much income your business generated in the previous twelve-month period.

    Next, you estimate your income for the future twelve months. You can make your projection by adjusting your 12-month historical figures to reflect any changes you expect over the coming year. For instance, if you expect your sales to increase by 10 percent, you can increase your income projection accordingly.

    Some business owners may find a business income worksheet bewildering. If the worksheet seems too confusing, ask your accountant to complete it for you.

    Projecting the Period of Restoration

    Once you have completed your 12-month income projection, you need to estimate the period of restoration. To protect your business, your estimate should be based on a worst-case scenario.

    For example, suppose you own a building in which you operate a warehouse. If the building is destroyed by a fire or a tornado, how much time will you need to get your business running again? Reconstructing a building involves many steps.

    First, an insurance adjuster will evaluate the loss. Next, you’ll need an architect to design a new building and a contractor to do the construction. Once you’ve considered all the steps involved in rebuilding, you can estimate how much time they will take. Your estimated period of restoration may be six months, a year, or longer.

    Beware Coinsurance Penalties!

    Many business income forms include a coinsurance clause. This clause imposes a penalty if the limit on your policy is less than the required amount. Coinsurance applies to your policy if a coinsurance percentage is listed in the declarations. The percentage may be anywhere from 50% to 125%. It indicates the amount of insurance you must carry to avoid a penalty.

    For example, suppose that you have purchased business income coverage based on an income projection of $1 million. Your policy includes a coinsurance requirement of 80%. To avoid a penalty, you must purchase a limit of at least $800,000 (.80 X $1 million). You purchase only $700,000 as a cost-saving measure.

    Three months into your policy period a fire breaks out in your warehouse. The fire damages the building, forcing you to shut down your business for several weeks. You suffer a $175,000 income loss due to the shutdown. You have under-insured your business income exposure by $100,000. Here’s how your insurer calculates your loss payment:

    Maximum loss payment = loss amount X (limit purchased/ the limit required)

    Amount paid by your insurer pays = $175,000 X (700,000 / 800,000) or $153,125

    You must pay the remaining $21,875 yourself. This amount represents the coinsurance penalty. You can avoid a penalty by purchasing the required amount of business income coverage. Another option is to avoid coinsurance altogether by purchasing business income coverage on an agreed value basis.

    Premium Adjustment Endorsement

    As noted above, it is important to purchase enough business income coverage to avoid a coinsurance penalty. Yet, it is also possible to purchase too much insurance. If the limit you purchase exceeds the amount required by the coinsurance clause, you will have wasted money on unused insurance. The Premium Adjustment Endorsement provides a solution to this problem.

    The endorsement provides a refund if your business income limit exceeds the amount required by the coinsurance clause. You must submit two reports of your business income values to your insurer. One must be filed when your policy begins (or when the endorsement is attached).

    The second must be submitted within 120 days of the date your policy ends. Your insurer will compare the limit you purchased to your required limit based on your actual values. If the limit you purchased exceeds the required limit, your insurer will return the excess premium.

    At a Glance:

    Learning how to calculate your taxable income involves knowing what items to include and what to exclude. Simply stated, it’s three steps. You’ll need to know your filing status, add up all of your sources of income and then subtract any deductions to find your taxable income amount.

    So, how do you determine your taxable income exactly? This post will break down the details of how to calculate taxable income using these steps.

    Keep in mind, your income is part of what determines how much you owe in federal and state income taxes. As you prepare your tax return, it helps to understand how the tax law views your income and how to determine taxable income.

    How to determine taxable income: Step-by-step

    How to compute your business income

    Step 1: Determine Your Filing Status

    First, determine your filing status. If you are married, your best option is usually to file jointly. If you file your taxes jointly with your spouse, you are required to add all of your income together to determine the total. You can combine your deductions, and you pay your taxes jointly.

    Even if you are married, though, you can decide to file separately. When you file separately, it means each of you adds up your income, and you pay your taxes separately. You have to divide up your deductions. Both of you can’t use the same expenses to calculate the amount of your separate deductions. Some states have property rules that require married couples who file separate returns to combine certain income and expenses owned by both spouses and then split the income and expenses equally on the returns. These states are known as community property states.

    If you aren’t married, you file as single. In some cases, single people and those that are considered unmarried for tax purposes may file as head of household.

    Step 2: Consider Your Types of Income

    The IRS requires you to report all of your income. This includes your side income, interest income, and other income on top of what you might have earned from wages and tips. All of this income is reported directly on your Form 1040 or Schedule 1.

    Your total gross income is determined by adding up all types of income that you have received during the calendar/tax year. There are different lines on the front of the Form 1040 and Schedule 1 for different types of income, but by the time you get to the end, you will have added it all up.

    If you file separately instead, you will need to be careful about which income belongs on yours and your spouse’s return. You will need to verify whose name is on which assets and report the income accordingly. If you live in a community property state, different rules apply, and you may each have to report 50% of the community income. You will also need good records dividing up deductions since you both won’t be able to use the same expenses when you calculate your deductions.

    Step 3: Calculate Deductions and Taxable Income

    The next question you should be asking yourself is “How do I figure my taxable income?” This step will help you find your taxable income, after deductions.

    Once you report all of your income on your Form 1040 and Schedule 1, you will then have the chance to adjust your income on Schedule 1.

    Using Schedule 1, you may be able to reduce your income with the help of contributions to a traditional IRA, student loan interest, self-employment deductions, and other expenses. Adding these up on line 22 of Schedule 1 gives you the total adjustments. Your Adjusted Gross Income (AGI) is then calculated by subtracting the adjustments from your total income.

    Your AGI is the next step in figuring out your taxable income. You then subtract certain deductions from your AGI. The resulting amount is taxable income on which your taxes are calculated. Typically you can take either the standard deduction or itemized deductions. If you’re a business owner you may also be eligible for the qualified business income deduction.

    After you figure your tax, you may be eligible for certain credits that lower your tax liability, such as the child tax credit and education credits.

    If you are married, it’s possible to run the calculations more than one way to decide what would result in the lowest household tax liability. Run the numbers as married filing jointly, as well as for filing separately, and then see which will lead to less money paid in taxes total.

    Help with how to calculate taxable income is here

    If you’d rather not go it alone, we’re always here to help. Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, we’ll help you determine your taxable income as part of preparing your return. Plus, you can count on H&R Block to help you get back the most money possible.

    Calculating an accounting profit or loss has to be done by all businesses of any size, from the small solopreneur blogger to the large enterprises and corporations. Why?

    It shows if the business is making money or losing money..

    ..this is kind of important!

    How to compute your business income

    A profit and loss report is also known as an income statement – they mean the same thing and show the same information but the wording is different depending where in the world you are.

    The profit and loss report | income statement is the most important and basic of reports that any business should produce, and is not very difficult to do.

    How to Calculate Account Profit

    A business cannot show a profit at the same time as a loss. It can only be one or the other.

    How to compute your business income

    To calculate the accounting profit or loss you will:

    • add up all your income for the month
    • add up all your expenses for the month
    • calculate the difference by subtracting total expenses away from total income
    • and the result is your profit or loss

    See these examples:

    See how the loss is shown with a negative sign. Another method is showing the numbers in red -$25 , or in brackets like this ($25).

    How to compute your business income

    What kinds of accounting profit are there?

    There are two kinds of accounting profit. They are:

    1. Gross profit
    2. Net profit

    Gross if the result of deducting the cost of goods sold from the income.

    Net is the total after deducting expenses from the gross profit.

    Here is a quick example that includes cost of goods sold:

    How to compute your business income

    Income and expenses

    Having a loss to avoid paying taxes might sound appealing but it’s not so good for the financial well-being of the business.

    Income

    The income on the profit and loss report includes money derived from:

    • the sale of services
    • the sale of products
    • or funds from other income such as interest earned on savings at the bank

    Expenses

    The profit and loss statement shows only deductible expenses.

    Deductible expenses (overheads) are those expenses that your tax department has approved the use of to reduce the net profit.

    The amount of tax your business pays is calculated on the net profit.

    The higher the profit, the higher the tax.

    Non Deductible expenses are not included on your profit and loss.

    They are instead shown on the balance sheet and include things like:

    • loan repayments
    • inventory
    • tax
    • owner’s drawings
    • investments

    Here is an example profit and loss report showing the Gross and Net losses

    How to compute your business income

    If the report shows a gross loss as in the example above, this means there is not enough money to cover the overheads of the business and that the following could have occurred:-

    • The mark up on the sales price is too low
    • There are too many discounts being given to customers
    • Not all direct costs have been on-charged to the customer as they should have been

    A review of the systems in place will be necessary to correct these problems and save the business from financial ruin.

    How often to calculate the accounting profit

    A profit and loss report | income statement should be prepared regularly during the financial year for the business owner to analyze.

    A minimum of once a month is recommended.

    If you struggle with this, then outsource your reporting to a bookkeeping expert who can prepare the report and also give you an explanation of what is happening with your business financials.

    Note also, these monthly reports won’t show expenses such as depreciation of fixed assets (unless you use accounting software such as Xero that allows you to process the deduction every month) but it can be left to be calculated by an accountant at the end of a financial year.

    Depreciation is inserted underneath the Net Profit and deducted to show the Taxable Profit.

    Terminology

    Here are some alternatives to the various terms used:-

    Profit and Loss Report = Income Statement

    Cost of Goods Sold = Cost of Sales or Direct Costs

    How to Calculate Business Gross Income

    How to compute your business income

    vgajic / Getty Images

    Business gross income is a company’s total income from all sources before subtracting taxes and other expenses. Gross income is a significant figure because it’s the foundation for many other financial calculations that give insight into a company’s financial health.

    If you run a business, it’s vital to know how to calculate and use gross income. Learn more about how it works and the benefits.

    What Is Business Gross Income?

    Gross business income is the total income a business receives before any taxes, expenses, adjustments, exemptions, or deductions are taken out. It is calculated on a business tax return as the total business sales less cost of goods sold (COGS) and appears on the income (profit and loss) statement as a starting figure. From there, it is reduced by returns, allowances, and other deductions to get net income or net earnings.  

    How to Calculate Business Gross Income

    To calculate your business gross income, begin by adding up the total sales before anything is subtracted. Next, add up the total COGS, which is the amount that was required to produce or buy the products sold. For example, if you sell cars, you would add up the cost of the engine, tires, and any other parts purchased to make the car. Subtracting the COGS from revenue will give you the business gross income.

    How to compute your business income

    For instance, if your business sold $1 million in products and the cost to produce those products was $600,000, your gross income would be $400,000.

    How Business Gross Income Works

    One of the more important reasons to know your business’s gross income is its use for tax purposes. Each company must report their gross income on their business tax return, and this number is used to determine how much taxes are owed. Outside of that, it’s significant because it’s the basis for many other business financials that determine your business’s profitability and viability.

    By knowing the gross income, you can calculate the gross profit margin, which is the percentage of revenue remaining after subtracting COGS. For example, if sales are $1 million and gross income is $400,000, the gross profit margin would be 40%. Knowing this percentage gives you an idea of how much your COGS is taking away from your sales.

    While an increase in gross income is a good thing, an increase in COGS and a decrease in gross profit margin are not ideal.

    Difference Between Gross and Net Income

    A company’s gross income focuses on all revenue before any expenses, while the net income considers all of the following:

    • Payroll costs
    • Taxes
    • Utilities
    • Deductions
    • Business operation costs

    In accounting and financial terms, you always go from gross to net when performing any calculations. Gross numbers are figures that have not had any amount deducted from them, and they are always the starting point. Net income will always be lower than the gross income.

    A company’s net income is referred to as its top line because it’s the top line on its income statement. Once operating expenses, taxes, and other deductions are taken into account, you arrive at the net income, or bottom line. The bottom line shows a company’s profits for that statement period.

    Limitations of Business Gross Income

    One major drawback of business gross income is it doesn’t account for business and operational expenses. It’s hard to get an accurate picture of a company’s financial health by solely looking at the gross income; you need to know their other expenses.

    A business may have a gross income of $1 million, but that doesn’t mean as much if they have $800,000 in expenses and a $100,000 tax bill. Gross income is a great starting point, but its best used as a means to an end. It doesn’t tell the full story.