Definition: Gross Profit
What is Gross Profit?
Gross Profit is the amount you keep from selling something after subtracting your costs. For example, the Gross Profit from selling a cookie is the amount you sell the cookie for minus the costs you acquired making the cookie. Let's say it cost 50 cents to make the cookie and you sold it for $4, the Gross Profit from the sale is $3.50.
In accounting terms, Gross Profit is equal to Costs minus Price. Cost is the amount paid to acquire the item that will be sold. Price is the amount the customer will pay. Let's calculate the Gross Profit on the cookie.
Gross Profit = Price - Costs
Gross Profit = $4 - $0.50
Gross Profit = $3.50
Gross Profit does not include the common or general operating costs of running a business. Examples of common/general costs are rent, insurance, cleaning supplies, etc. These costs are considered as the shared costs of all products and services. For example, if your business sold cookies, smoothies and sandwiches, a common cost of all three would be rent, cleaning and insurance. Since they are common to all three, they are excluded from calculating Gross Profit. Excluding common costs from Gross Profit allows a business owner to better decipher how their individual products preform against one another.
Gross Profit (Cookies) = Price - Costs
Gross Profit (Smoothies) = Price - Costs
Gross Profit (Sandwiches) = Price - Costs
Total Gross Profit = Cookie Gross Profit + Smoothie Gross Profit + Sandwich Gross Profit
The costs in Gross Profit are referred to as the Cost of Goods Sold, abbreviated as COGS. The term refers to the costs a business owner acquires when purchasing goods for resale. We can rewrite the Gross Profit calculation and calculate the Gross Profit on the cookie sale as:
Gross Profit = Price - COGS
Gross Profit = $4 - $0.50
Gross Profit = $3.50
But what about the general costs of operating a business? Those are taken into account after a business owner figures out their Gross Profit on all goods and services. The net remaining amount after all costs is called Net Profit. We can write this a couple of ways:
Net Profit = Total Gross Profit - All other expenses
or
Net Profit = All Income - All Expenses
This was a crash course explanation of Gross Profit. If you want to learn more, check out our online lesson where you will learn to measure and compare the three forms of profit: profit margin, gross profit and net profit.
In accounting terms, Gross Profit is equal to Costs minus Price. Cost is the amount paid to acquire the item that will be sold. Price is the amount the customer will pay. Let's calculate the Gross Profit on the cookie.
Gross Profit = Price - Costs
Gross Profit = $4 - $0.50
Gross Profit = $3.50
Gross Profit does not include the common or general operating costs of running a business. Examples of common/general costs are rent, insurance, cleaning supplies, etc. These costs are considered as the shared costs of all products and services. For example, if your business sold cookies, smoothies and sandwiches, a common cost of all three would be rent, cleaning and insurance. Since they are common to all three, they are excluded from calculating Gross Profit. Excluding common costs from Gross Profit allows a business owner to better decipher how their individual products preform against one another.
Gross Profit (Cookies) = Price - Costs
Gross Profit (Smoothies) = Price - Costs
Gross Profit (Sandwiches) = Price - Costs
Total Gross Profit = Cookie Gross Profit + Smoothie Gross Profit + Sandwich Gross Profit
The costs in Gross Profit are referred to as the Cost of Goods Sold, abbreviated as COGS. The term refers to the costs a business owner acquires when purchasing goods for resale. We can rewrite the Gross Profit calculation and calculate the Gross Profit on the cookie sale as:
Gross Profit = Price - COGS
Gross Profit = $4 - $0.50
Gross Profit = $3.50
But what about the general costs of operating a business? Those are taken into account after a business owner figures out their Gross Profit on all goods and services. The net remaining amount after all costs is called Net Profit. We can write this a couple of ways:
Net Profit = Total Gross Profit - All other expenses
or
Net Profit = All Income - All Expenses
This was a crash course explanation of Gross Profit. If you want to learn more, check out our online lesson where you will learn to measure and compare the three forms of profit: profit margin, gross profit and net profit.
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