Term

What is Gross Profit?

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Gross Profit

In accounting, gross profit or sales profit is the difference between income and the cost of making a product or providing a service before deducting overheads, payroll, tax and interest. Note that gross margin is a term commonly used in the US, while gross profit is more common in the UK.

There are some formulas for gross profit calculation. 

Gross profit for the manufacturer = Revenue – The cost of goods or services sold, including depreciation.

Gross margin for retail = Revenue – Cost of goods sold

Revenue includes all profits from the sale of goods or services for the selected reporting period (a month or a quarter). Money received from the sale of property or equipment cannot be added to this income item. For example, for an online store of women’s clothing, the total income will be the entire amount of money received from the sale of clothing and accessories. No additional income is added.

When calculating the cost of goods for gross profit, only those costs are used that are involved in the full range of actions with goods: from the moment of purchasing materials for goods and ending with costs for shipping to the end customer. These costs are temporary and depend on fluctuations in store order levels. What these costs may include: salaries to sellers, bonus payments to employees related who have a high sales level of goods or services, utilities, delivery payments, this works more often for online stores, commission payment when customers pay for goods using electronic money or cards.

Fixed costs such as rent, office equipment, salary payments to other employees outside the sales department, bank accounts for loans, and others are not included in the calculation for the company’s gross profit.

 

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