What is Gross Profit? Gross Profit Formula

What is Gross Profit? Gross Profit Formula

Gross Income Definition

Gross income, also called gross profit is the total earnings by a person on a paycheck before deducting taxes and other expenses. It comprises of all incomes a person earns from different sources – including wages, rental and interest income, and dividends. For instance, if the revenue earned by Mr A for rendering consultancy services to Mr B is $300,000, the figure is the gross profit earned by that person.

A revenue sources for businesses may include revenue from; 
  1. Selling goods and services
  2. Intellectual properties 
  3. Income from rental property
  4. Capital gains from investments, etc.
Gross Profit Formula

The gross profit formula is very straightforward but requires a lot of background prep work and bookkeeping. There should be accurate bookkeeping records kept on cost of goods sold (COGS) versus units produced.

What is Gross Profit? Gross Profit Formula

Gross Profit = Sales revenue - costs of goods sold

Sales Revenue

Sales revenue is the total amount a company earns from selling its inventories or services in its main business with no other deductions taken into account.

Cost of goods sold

COGS are costs associated with manufacturing the products that companies sell. These are any costs related to raw materials used in production, supply costs, machinery costs or labor expenses. These are the direct costs involved in manufacturing the good or service companies offer their consumers.

How to Calculate Gross Profit

An individual's gross income is often a figure required by lenders to decide whether to advance credit to a person. The same applies to landlords when checking whether a potential tenant will be able to pay the rent promptly. It is the starting point when computing taxes remittance to the government.

Gross Income for an Individual

A person's gross income is the amount of money earned before any deductions or taxes are removed. A full-time employee has their annual salary or wages before tax as their gross income. However, they may also have other sources of revenue that are included when calculating their income.

For example, any dividends on stocks held are factored into the gross income. Other incomes that should be considered are income from rental property, interest income from savings and investments, etc.

Example of gross profit

Mr James earns $100,000 from his financial management consultancy services annually. He also earns $70,000 in rental income from his real estate properties, has $10,000 in dividends from shares he owns at XYZ limited, and interest income from his savings account amounted to $5,000. 

Therefore, Jame’s income are calculated as follows:

Gross Income = 100,000 + 70,000 + 10,000 + 5,000 = $185,000

Gross Income for a Business

Gross profit is an item in a company's income statement, and it is the company’s gross margin for the year before indirect expenses, interest, and taxes are deducted. It portrays the revenue that a company earned from selling its goods or services after deducting the direct costs incurred in manufacturing the goods being sold.

Direct costs are expenses such as labor costs, equipment used in the production process, supply costs, cost of raw materials, and shipping costs. Taxes are not deducted since they are not directly related to the production and sale of the product.

The formula for calculating a company's gross income is:

Gross Income = Gross Revenue – Cost of Goods Sold (COGS)
For example;

Assuming that the gross revenue of ABC limited, a phone manufacturing company is $1,300,000, and the expenses were as follows:
  1. Cost of raw materials: $150,000
  2. Supply costs: $60,000
  3. Cost of equipment: $340,000
  4. Labor costs: $150,000
  5. Packaging and shipping: $100,000
The gross profit is calculated as follows:

Gross Income = (1,300,000) – (150,000 + 60,000 + 340,000 + 150,000 + 100,000)

= (1,300,000) – (800,000) = $500,000

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