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What Is Gross Profit? - Definition, Formula & Calculation

What Is Gross Profit? - Definition, Formula & Calculation
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  • 1:29 Components of Gross Profit
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

When we think of the word profit, we often think of how much money was made for doing something. In the accounting industry, there is more than one kind of profit. In this lesson, we'll discuss what gross profit is and how it is calculated.

Gross Profit: Definition and Formula

Gross profit is the amount of revenue that a company brings in before subtracting the expenses associated with that revenue. It is reported on the classified income statement. 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 gross profit, you must have two important figures. First, you must have the dollar amount of net sales for a given time period. Second, you must have the dollar amount for cost of goods sold (COGS). The formula for calculating gross profit is: Gross Profit = Net Sales - Cost of Goods Sold

Let's look at an example. Lea recently opened her own clothing store. She knows that the store has been busy but wants to know how well she is doing financially. Lea decides to figure out her gross profit on the merchandise she has sold. In her accounting software, Lea is able to pull up the total dollar amount for her net sales and her costs of goods sold. Net sales for the quarter are $15,000. Cost of goods sold for the same accounting period is $8,695. What is Lea's gross profit?

  • Gross profit = net sales - COGS
    • Gross profit = $15,000 - $8,695
      • Gross profit = $6,305

Components of Gross Product

What happens if you are not given the dollar amount for net sales and cost of goods sold? Can you still figure out what gross profit is? Of course you can. It will take more steps, but it can be done. Let's break down the calculation of both net sales and cost of goods sold. Net Sales = Gross Sales - Sales Returns and Allowances - Sales Discounts.

As you can see by the formula, the dollar amount for net sales is figured by subtracting the amount of sales returns and allowances and the amount of sales discounts from the total sales amount. Look back at the previous example. What if Lea had the following information?

The total sales at Lea's store for the quarter were $16,725. The total for sales returns and allowances was $725. Lea had a grand opening sale, which resulted in total discounts of $1,000 for the quarter. The cost of goods sold was $8,695. What is her gross profit for the quarter?

  • Gross profit = net sales - COGS
    • Gross profit = (sales - sales returns and allowances - sales discounts) - COGS
      • Gross profit = ($16,725 - $725 - $1,000) - $8,695
        • Gross profit = $15,000 - $8,695
          • Gross profit = $6,305

As you can see, Lea's gross profit is the same, even though it was figured differently.

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