Gross Profit Formula: Profit, Loss, Gain & Cost

Profit is the surplus of revenue over expenditure and every company runs on their profit for its survival. The profit is determined after evaluating and deducing the goods selling cost from the revenue. Profit is classified into Net profit and Gross profit. The gross profit formula also known as gross margin is the overall revenue minus the cost of things sold. It is the total profit of a company before all tax payments as well as interests. 

Key Terms: Profit, Revenue over expenditure, Net profit, Gross profit, Gross margin, Tax, Incomes

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Gross Profit

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Profit is the excess of revenue over expenditure. Profit is classified into Net profit and Gross profit. Subtract the total revenue from the cost of goods sold to get the gross profit. Indirect expenses or incomes do not fall under the gross profit (Gross margin). Only the trading activities of a company are considered for gross profit calculation. 

Gross Profit

For households/ individuals, the gross profit is the sum of wages, interest payments, rents, profits or other earnings. It is the total amount that we receive before the deductions and other payment of taxes. Hence, gross profit can be identified as the exact opposite of net income or net profit. However, gross profit cannot be deemed a fail-safe method of calculating net efficiency.

Standardized income statements prepared by financial data services may have a different summation of gross profit. These statements display gross profits separately, but this system is only available for public companies. It would be much more beneficial to investors reviewing private companies' income to familiarize themselves with the cost and expense items on a non-standardized balance sheet, so that they may be more used to understanding gross profit calculations.

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Gross Profit Formula

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Gross profit can be calculated using the gross profit equation. 

Gross profit = revenue - cost of goods sold

Here, the profit or revenue is the amount a company gets after selling the products over a specific time. The total amount before any deductions and payment of taxes are taken here. On the other hand, the Cost of Goods Sold (COGS) includes direct costs which are associated with production, not including the costs of administration and marketing. It takes into account depreciation, labor cost, factory overheads and costs of material and storage. 

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Gross Profit Margin 

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Gross profit can be used to calculate another metric, the gross profit margin. This can be used to calculate the overall efficiency of the company and it is expressed as a percentage value whereas gross profit is expressed as currency. These represent different things as the gross profit may be on the rise while the gross profit margin may indicate a fall in business. The formula for gross profit margin is as follows:

Gross margin = revenue - cost of goods sold/ revenue

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Things to Remember

• Gross profit is the profit or amount that a company makes after deducing the selling and receiving cost. It is the amount of total revenue minus the cost of goods sold.
• The gross profit can be calculated with the help of the gross profit equation. Gross profit ratio = gross profit/ net sales. 
• Another metric namely gross profit margin can be calculated using gross profit. Gross profit is the currency value while the gross profit margin is the percentage. 
• Gross profit margin is used to compare the company’s production efficiently over time.

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