Gross Profit refers to the excess of net sales over the cost of goods sold. Companies deduct the cost of goods sold from sales revenue in order to determine gross profit. For this computation, companies use net sales as the amount of sales revenue. Net sales can be determined by subtracting returns, allowances and discounts from the gross sales. The cost of sold goods here signifies the cost at the service providing stage and not at the production stage.
Gross Profit = Net Sales - Cost of Sold Goods
For example, on the basis of the sales data, PW Audio’s gross sales of the year were worth $1000000 and the sales returns cost $540000. The cost of goods sold under the perpetual inventory system was $316000.
So, PW Audio’s gross profit = ($1000000 - $540000) - $316,000
= $460,000 - $316,000
= $144,000
It is easy to mix net profit with gross profit but they have a very clear difference where the gross profit does not require the production cost to be subtracted from the revenue but net profit does.
Use of the Term in Sentences
- Keeping the cost of sold goods and services means the gross profit will see a steady rise.
- Being able to maintain a high gross profit stays one of the major goals of businesses and the income statement shows how successful they’ve been.