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What is gross profit?

Author:
Harold Averkamp, CPA, MBA

Definition of Gross Profit

Gross profit is defined as net sales minus the cost of goods sold.

Gross profit is sometimes referred to as gross margin. (However, gross margin can also mean the gross profit expressed as a percentage of net sales.)

Gross profit is presented on a multiple-step income statement prior to deducting selling, general and administrative expenses and prior to nonoperating revenues, nonoperating expenses, gains and losses.

Example of Gross Profit

Let’s assume that a manufacturer has net sales of $60,000 and its cost of goods sold (using absorption costing) is $39,000. Therefore, the manufacturer’s gross profit is $21,000 ($60,000 minus $39,000). The gross profit ratio or gross profit percentage is 35% (gross profit of $21,000 divided by net sales of $60,000).

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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