Gross profit is the amount of revenue that a company brings in prior to deducting selling, general and administrative expenses associated with that revenue. It is reported on the classified income statement.
When you calculate your gross profit, you should understand it’s different from operating profit, which is actually gross profit minus operating expenses. It’s also different from net profit, which is operating profit minus taxes and interest.
In order to calculate your gross profit, you must have two important figures. First, you must have the amount of net sales for a given time period. Second, you must have the amount for cost of goods sold (COGS). The formula for calculating gross profit is: Gross Profit = Net Sales – Cost of Goods Sold
Some people use the term gross margin and gross profit interchangeably. But essentially, gross profit is net sales minus the cost of goods sold.
To illustrate gross profit, let’s assume that your company’s net sales is N3,000,000 and its cost of goods sold (using absorption costing) is N400,000.
Gross profit = net sales – COGS
- Gross profit = N3,000,000 – N400,000
- Gross profit = N2,600,000
- Gross profit ratio or gross profit percentage = 86.67% ( N400,000 / N3,000,000)