Dictionary / Adjusted Gross Income
What does Adjusted Gross Income mean in accounting?
Quick definition
Tax & complianceThe gross income of an individual, reduced by (a) business expenses [as to employees, only those specified in section 62 (2) of the Internal Revenue Code], (b) any deductions allowed for income-producing property, (c) certain losses from sales or exchanges of property, (d) self-employment expenses, and (e) moving expenses. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
Read more below
The gross income of an individual, reduced by (a) business expenses as to employees, only those specified in section 62 (2) of the Internal [Revenue Code], (b) any deductions allowed for income-producing property, (c) certain losses from sales or exchanges of property, (d) self-employment expenses, and (e) moving expenses. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
Examples
Electrical billings and duplex rent
You run a one-person electrical shop and also collect rent on a duplex. For the 1040 you finish in March, gross income is $128,400: $96,000 billed to a condo association plus $32,400 of duplex rent. You subtract $34,800 of shop operating expenses (truck, supplier parts, insurance), $18,200 of duplex expenses, and $2,100 of self-employment expenses that sit on the individual return, so adjusted gross income is $73,300. That figure belongs on Form 1040. Use QuickBooks Online for the shop P&L if you need support; do not add an AGI account to the company file.
A loan form is not the bakery P&L
In January a credit union asks for last year's adjusted gross income on a delivery-van loan. Your bakery shows $64,000 net income on the December P&L in QuickBooks Online. You take a $48,000 W-2 from the LLC plus $1,600 of personal interest, so personal gross income is $49,600. You cannot cut that by the $880 of aprons and clogs you bought yourself; for employees, only the business expenses named in IRC section 62(2) reduce AGI. Write $49,600 on the loan form, not the bakery profit.
Why it matters
Adjusted gross income is a personal Form 1040 figure, not a line on the business P&L. You will not post it most months; it appears when you file the individual return, pay estimated tax, or fill a form that asks for last year's AGI. Start from the person's gross income and subtract only the allowed cuts: certain business and self-employment costs, deductions on income-producing property, some property sale losses, and moving expenses. Use the company's year-to-date profit as a stand-in and you will misstate a tax estimate or any form that asks for AGI.
Keep learning
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What is Adjusted Gross Income in bookkeeping?
The gross income of an individual, reduced by (a) business expenses as to employees, only those specified in section 62 (2) of the Internal [Revenue Code], (b) any deductions allowed for income-producing property, (c) certain losses from sales or exchanges of property, (d) self-employment expenses, and (e) moving expenses.
When should I use Adjusted Gross Income?
Use Adjusted Gross Income when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Adjusted Gross Income?
Adjusted Gross Income is used for adjusted gross income entries, while Abandonment covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.