Accounting terms

Dictionary of all accounting terms

What is Gross Profit?

Gross profit is the total revenue of a company minus the cost of goods sold.

Gross profit is one of a few measurements that companies use to check their profitability. It is the profit that companies make after they have deducted the cost of goods sold, which is all the costs associated with the company providing services.

Gross profit is also known as 'sales profit,' 'gross margin' and 'gross income.'

Gross profit can be calculated as such:

Revenue - Cost of Goods Sold = Gross Profit

It is important to remember that gross profits only looks at a company's variable, not fixed, costs.  These costs include:

  • materials
  • direct labor (non-salary; e.g., hourly or commission-only)
  • credit card fees for customer purchases
  • production site utilities
  • shipping and transportation, etc.

Fixed costs, such as rent, salary, etc., are not in the scope of gross profit.

Gross Profit Margin

Gross profit can also be used to calculate what's known as 'gross profit margin.' This metric is expressed as a percentage, whereas gross profit is a currency value.

Gross profit margin can be calculated as such:

Gross profit/revenue = (revenue-cost of goods sold)/revenue = Gross Profit Margin

Gross profit margin is crucial for checking a company's production efficiency over the years. Gross profit can be misleading, as gross profits can increase while gross profit margins can decrease.

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