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Gross Earnings vs. Net

Original post by John Kibilko of Demand Media

Both individuals and companies have gross and net earnings; implications vary for each.

In a nutshell, gross earnings are the total amount of monies that a company or a person receives -- all income from any source. Net earnings equals gross earnings minus expenses, including taxes. Gross and net earnings are calculated differently for individuals and for companies, but similarities exist. Both earn incomes and are allowed certain operating allowances, tax deductions and other exemptions to "adjust" their taxable income totals.

Gross Earnings

For tax purposes, gross income is the launching point for determining how much money in taxes will be paid to federal and state governments. This applies to people, businesses, and other entities such as estates and trusts. For individuals, gross income isn't limited to wages, salaries and business revenues. It includes interest, dividends, pensions, alimony and other sources, according to the Accreditation Council for Accountancy and Taxation's website. Corporate gross earnings, reported on income statements, are a company's total sales for a specified period of time minus its cost of goods sold. For bookkeeping purposes, gross income includes all accounts receivable payments. In short, all money received by a business is gross income.

Net Earnings

Net earnings -- typically called net income for individuals -- represent all the money that a person takes home. Gross income is adjusted by subtracting tax allowances, credits and other deductions to yield "adjusted gross income," or AGI, upon which the person's taxes are based. The money left to after taxes in that person's net income or earnings. For businesses, net earnings, or profits, are calculated by adjusting gross earnings -- or revenue -- and subtracting operating expenses, depreciation, interest payments, taxes and other expenses. This is an important indicator of a company's financial health, as is the resultant earnings-per-share number.

Individual Taxpayer Example

Assume someone earns $100,000 in wages, salary, tips, dividend payments and interest income. After calculating his adjusted gross income by subtracting tax credits, child care, and other deductions such as travel and moving expenses, he arrives at an AGI total of $60,000. This is the total on which he pays federal income tax. For tax year 2011, a taxable income of $60,000 places a person in the 25 percent tax bracket if single. He would pay 15 percent of his first $36,600 of AGI, plus 25 percent of all earnings over $36,600.

Business Earnings

Businesses distinguish among net earnings -- profits -- net profit margins, gross versus net profits, and price-earnings or P/E ratios. A profit margin, for instance, informs investors and company officials how much money a company makes for each dollar generated by sales or revenues. This allows same-market comparisons with competitors. Net profit margins can be calculated by dividing revenues by net income after taxes. You also can divide revenues by (net income + minority interest + tax-adjusted interest). Gross profit margin helps formulate pricing policies and indicates actual markup margins, and can be expressed in the formula revenue divided by (revenue minus cost of goods sold). Price-earnings ratio -- one of the oldest ways to value a company's stock -- is derived by dividing market value per share by earnings per share. A company whose stock trades at $50 a share and whose past 12 months' earnings were $2 per share has a P/E ratio of $25.

                   

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About the Author

John Kibilko has been writing professionally since 1979. He landed his first professional job with "The Dearborn Press" while still in college. He has since worked as a journalist for several Wayne County newspapers and in corporate communications. He has covered politics, health care, automotive news and police and sports beats. Kibilko earned a Bachelor of Arts in journalism from Wayne State University.


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