What Is Gross Profit?

Formula, margin, and a worked example in plain English.

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Quick answerGross profit is revenue minus the cost of goods sold (COGS). It shows how much a business earns from its products before paying operating expenses such as rent and salaries.

Gross profit = Revenue − Cost of goods sold

Gross profit margin	Gross profit ÷ Revenue × 100
Appears on	Income statement
Topic	Financial accounting · Profitability

Gross profit in plain English

Gross profit answers one question: after paying directly for the goods we sold, how much is left? Cost of goods sold includes direct materials, direct labour and other direct production costs. Rent for the head office and marketing are not part of it.

Worked example

Revenue is 50,000 and cost of goods sold is 30,000.

Gross profit = 50,000 − 30,000 = 20,000. Gross profit margin = 20,000 ÷ 50,000 × 100 = 40%.

Common mistakes

Deducting operating expenses when calculating gross profit.
Confusing gross profit with net profit, which is calculated after all expenses.

Frequently asked questions

What is the difference between gross profit and net profit?

Gross profit deducts only the cost of goods sold. Net profit deducts all expenses, including operating costs, interest and tax.

What is included in cost of goods sold?

Direct materials, direct labour and other direct costs of producing or buying the goods sold.

What is a good gross profit margin?

It varies by industry. Compare a business with similar firms and with its own past results.

Keep learning

This page is for general learning. Accounting rules vary by country and standard.