About Gross Profit Formula
The pure trading profit is calculated using the gross profit formula. Simply put, profit is the difference between revenue and expenditure. After deducting the cost of products sold from the income, we receive the gross profit. The word "gross profit" is also known as "gross margin." It does not include direct revenue or expenses. Profitability can be demonstrated by utilising the gross profit formula to calculate gross profit.
Meaning of Gross Profit Formula
After deducting selling and receiving costs, gross profit is the amount of money or profit that a corporation makes. It is the profit before any interest and taxes are paid. The gross profit of a firm is indicated in the income statement, and the formula used to calculate the gross profit of a corporation requires the cost of items sold and revenue collected from these sales. Rent, insurance, salaries, and other fixed costs are not included in the gross profit. However, the gross profit formula takes into account the cost of materials, consumer credit card fees, equipment, and so on. As a result, the gross profit formula is as follows:
- Gross Profit = Revenue - Cost of goods sold
Where,
Revenue = Sales - Sales return
Cost of goods sold = (Opening stock - Closing Stock) + (Purchase - Purchase Returns) + Direct Expenses + Direct Labour
To calculate the gross profit of a company by using the formula, here is a step-wise procedure:
- Determine the net revenue, which refers to the total gross sale.
- Determine the variable cost of sales that the organisation has attained.
- To calculate the entire gross profit, use the gross profit formula. i.e., Gross Profit = Revenue - Cost of goods sold
Formula for Gross Profit Margin:
Gross profit margin is the difference between the gross profit and the revenue. Gross profit margin is used to determine a company's production efficiency over time. While gross profit is measured in dollars, gross profit margin is measured in percentage. The gross profit margin is also crucial since the gross profit may increase while the margin decreases. For greater clarity, both the gross profit margin and the gross profit must be calculated. As a result, the gross profit margin is calculated using the following formula:
- Gross Profit Margin = (Revenue - Cost of goods sold)/Revenue
Maths Formulas prepared by HT experts are listed on the main page.
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