What is Annual Income?
Definition: Annual income is the total amount of money earned in a calendar year before taxes. It is the sum of all income perceived by an individual in that 12-month period.
Income, technically, comes from the concept of revenue. Revenue, in accounting definition, is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Revenue arises from the following transactions and events:
- The sale of goods (whether produced by the entity for the purpose of sale or purchased for resale);
- The rendering of services;
- Construction contracts in which the entity is the contractor. A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use;
- Deposits or receivables yielding interest; and
- Dividends from investments in shares of stock that are not accounted for using the equity method.
In General term, payment received in lieu of services or goods are called income, for example, salary received by any employee is his income. There are different type of income that can be considered depending on its source, for example, personal income, household income, national income, business income and many more.
Accordingly, for an individual, income is the total amount a person earns in a given period from all taxable wages, tips, and investment income like dividends and interest. For a business, income is the amount an entity earns after rendering services and/or selling goods in the ordinary course of its operation or any activities incidental thereto.
What Does Annual Income Mean?
Annual income can be expressed as a gross figure or a net figure. Gross annual income is the sum of all income received from different sources during the calendar year, that means from January 1 to December 31. This amount must be figured to calculate annual taxes to be paid. Also, it is a measure employed by banks and other financial institutions to assess an individual’s ability to pay for his financial commitments.
On the other hand, net annual income is the amount of money an individual actually receives, after taxes and other deductions are taken off. The different between both, to sum up, is that gross is before any deductions are made and net is a figure obtained after deductions are discounted. The easiest way to track annual income is through bank account reports (for self-employed individuals mostly) and through salary receipts (for salaried employees).
Annual income refers to how much income a person earns in one year, fiscal or calendar, before deductions. It is the gross cumulative amount earned by an individual in a span of twelve (12) months. To simply put it, annual means year and income means money earned. Knowledge of annual income, specially in computing such, is very important when it comes to filing taxes or applying for a loan.
Mr. Johnson is a sales representative at Phillips Pharmaceuticals Co. a company that manufactures and sales over-the-counter medications. He currently has a salary structure with both fixed and variable items. There’s a fixed baseline salary of $1,000 a month and there’s a sales commission that varies according to the amount of money he sells plus incentives. Tax season is coming and Mr. Johnson wants to figure out how much he has to pay.
He gave his accountant all his income receipts and after he reviewed them he estimated that Mr. Johnson’s gross annual income was $42,578. Now that he has this number he can figure out how much Mr. Johnson has to pay this year and he can also compare this figure with last year’s to see how he’s doing with the company.
What Qualifies as Income?
The definition of income varies by age. For anyone over 21 years of age, income can be:
- Personal income
- Income from a spouse or partner
- Trust fund distributions
- Social Security distributions
- Retirement Fund distributions
- Scholarships and grants
- Allowances and gifts
For anyone between 18-20, income can be:
- Personal income
- Allowances that can be verified by tax returns or other documents
- Scholarships and grants
What is Gross Annual Income?
Personal gross annual income is the amount on your paycheck before taxes and deductions. When you accept a job offer, this is what’s listed on your offer letter or contract.
When preparing and filing your income tax return, gross annual income is the base number you should start with. If you know your gross income, you’ll have a better idea of what taxes you will either owe or be returned. Your gross annual income is also the number that’s used to qualify you for a loan or a credit card.
Gross business income is listed on your business tax return. Gross income in business is calculated as the total company sales minus the cost of goods sold. This number is what investors look at when assessing a potential company.
Gross Annual Income versus Net Annual Income
You may encounter the terms “gross” or “net” connecting with the annual income. Gross annual income is your earnings before tax, while net annual income is the amount you’re left with after deductions. For a business, net income is sometimes referred to as profit, which is derived after deducting all the operating costs and expenses incurred in its operation.
In a business financial aspect, income is derived and measured using three common approaches, namely, (1) transaction or operation approach; (2) activities approach; and (3) balance sheet approach.
1. Transaction or Operation Approach
The transaction, or operation, approach is the most commonly-used approach. With this approach, accounting is done during the course of operations. This means that profit (or loss) from a given service line or product is booked right away.
Additionally, it separates out income from operations and any other external sources.
When the reporting period ends, say the end of a quarter, you had already booked the cost basis for assets and liabilities when they were incurred. There’s no need to try to go back and figure out values in the past; they are already logged.
2. Activities Approach
The activities approach is an assessment of an organization’s activities, instead of the transactions. In this way, it differs from the operations approach. Income is documented when certain activities or events take place, not as a result of specific transactions. In the activities approach, these activities trigger the recording of income: planning, purchasing, production, sales.
This approach is similar to the transaction approach; the activities approach is a little broader in scope, looking at an activity or event versus individual transactions.
3. Balance Sheet Approach
Comparison of the closing values (Assets minus outsider’s liabilities) of a firm with the values at the beginning of that accounting period is called as Balance Sheet approach. In above value, an addition to capital will be subtracted and addition of drawings will be added while computing the business income of a firm. Since, income is calculated with the help of Balance Sheet hence called as Balance Sheet approach.
Frequently Asked Questions
What is annual income?
An annual income refers to how much money a person makes in a year. This can be through wages, salaries, tips, commissions, or other taxable income.
How do we calculate annual income?
Basically, annual income for an individual can be computed by converting the hourly, daily, weekly, or monthly rates by following these formulas:
Hourly: annual income = rate per hour x 2,000
Daily income: annual income = rate per day x 250
Weekly: annual income = rate per week x 50
Monthly: annual income = rate per month x 12
What is the importance of calculating annual income?
The importance of calculating annual income is to understand how much tax is owed on the income earned. This helps people to plan and budget for their taxes throughout the year. Also, it is used to determine eligibility for certain tax deductions and credits.
What is the difference between taxable and non-taxable annual income?
Taxable annual income is the amount of money that is subject to federal and state income taxes. Non-taxable annual income is income that is not subject to income taxes. This includes money from certain types of investments, gifts, and inheritances.
Does annual income include a bonus?
It depends on the type of bonus. Bonuses that are considered taxable income would be included in annual income such as bonuses from work or commissions. Bonuses that are considered non-taxable, such as retirement bonuses, would not be included in annual income.