In accounting, gross profit, gross margin, sales profit, or credit sales is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. This is different from operating profit (earnings before interest and taxes). Gross margin is the term normally used in the U.S., while gross profit is the more common usage in the UK and Australia.
The various deductions (and their corresponding metrics) leading from net sales to net income are as follows:
- Net sales = gross sales â€" (customer discounts + returns + allowances)
- Gross profit = net sales â€" cost of goods sold
- Gross profit percentage = [(net sales â€" cost of goods sold)/net sales] × 100%.
- Operating profit = gross profit â€" total operating expenses
- Net income (or net profit) = operating profit â€" taxes â€" interest
(Note: Cost of goods sold is calculated differently for a merchandising business than for a manufacturer.)
See also
Gross Profit Margin Ratio, Defined and Explained - This video defines the gross profit margin ratio and explains its usefulness via an example. Edspira is your source for business and financial education. To view the entire video library...
- Cost of goods sold (CS)
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Profit margin (the ratio of net income to net sales)
- Gross margin (the difference between the sales and the production costs)
- Selling, general and administrative expenses (SG&A)
- Net income
- Income statement
References
