Why doesn't my hard drive have the advertised amount of space?

When you buy 120 Gigabyte hard disk, you will never see the size reported as 120GB. This FAQ looks at the reason why and at the issues involved. It does not consider the issue of file system overheads which will further decrease the free space after formatting.
I'm sure that at some point someone has told you that a Kilobyte is 1024 Bytes. If we are pedantic about the terminology used in describing storage however, they are wrong. A Kilobyte is by definition 1000 bytes, Kilo literally denoting 10^3 of something. What they are talking about is, in fact, a Kibibyte (2^10 Bytes.) This inconsistency causes problems because when people start talking about computer storage - Kilo is suddenly used incorrectly to mean "2^10" rather than the proper "10^3."

Here Follows a quick terminology break:
Giga- A Prefix meaning 1 Billion, or 10^9 of something.
Kilo- A Prefix meaning 1 Thousand, or 10^3 of something.
Gibi- A Prefix meaning 2^30 of something, derived from Gigabinary.
Kibi- A Prefix meaning 2^10 of something, derived from Kilobinary.
Equivalents for Mega-, Tera-, Peta-, etc. all exist in similar fashion.
While this seems a little fussy, it becomes important when talking about large quantities. The difference between a Kilobyte and a Kibibyte is 24 bytes (2^10 - 10^3,) an amount very few people are going to notice or care about. When we start looking at Gigabytes and Gibibytes however, the difference is 73,741,834 Bytes (2^30 - 10^9,) a significant quantity.

It naturally follows that as quantities get larger, this discrepancy increases. 120 Gigabytes translates to approximately 112 Gibibytes so naturally people feel cheated after formatting their new storage monster and finding less space than they expect. The amount in Gibibytes (and thus the amount of space that will be reported) can be calculated as follows:
Storage in Gibibytes = (Storage in Gigabytes)*(10^9)/(2^30)

So why don't hard drive manufacturers rate their drives in Gibibytes? Bizarrely enough, one pressing reason is to avoid confusing consumers. There have been movements to see KiB, MiB and GiB units introduced in storage to represent Kibibytes, Mibibytes and Gibibytes respectively. This would require re-branding of any products rated in the base 10 system as well as re-education of the end user. Marketing also comes into the equation as drive sizes increase. The first company to make the switch to Gibibytes would suddenly have a range of products that look smaller than their base 10 equivalents.

In the end, consistency is the most important point. Two different 120 Gigabyte drives are going to be almost exactly the same size regardless of manufacturer or model. The reasons for changing to a base 2 system simply aren't pressing enough to warrant the problems of doing so. It's a little annoying, but two minutes with a calculator will verify that 111.7 Gigs is, in fact, the correct amount of space for a 120 Gigabyte drive to be reporting.