In accounting

Accountancy

Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...

, gross profit or sales profit is the difference between revenue

Revenue

In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

 and the cost of making a product or providing a service, before deducting overhead

Overhead (business)

In business, overhead or overhead expense refers to an ongoing expense of operating a business...

, payroll

Payroll

In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...

, taxation, and interest

Interest

Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 payments. Note that this is different from operating profit

Earnings before interest and taxes

In accounting and finance, earnings before interest and taxes is a measure of a firm's profit that excludes interest and income tax expenses. Operating income is the difference between operating revenues and operating expenses...

 (earnings before interest and taxes).

Net sales are calculated:

Net sales = Gross sales – Sales of returns and allowances.

Gross profit is found by deducting the cost of goods sold

Cost of goods sold

Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

:

Gross profit = Net sales - Cost of goods sold.

Gross profit should not be confused with net income:

Net income

Net income

Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...

 = Gross profit – Total operating expense

Operating expense

An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure , is the cost of developing or providing non-consumable parts for the product or system...

s – taxes – interest.

Cost of goods sold

Cost of goods sold

Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

 is calculated differently for merchandising

Merchandising

Merchandising is the methods, practices, and operations used to promote and sustain certain categories of commercial activity. In the broadest sense, merchandising is any practice which contributes to the sale of products to a retail consumer...

 business than for a manufacturer

Manufacturing

Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...

.

Operating Profit = Gross Profit - Total operating expense

Operating expense

An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure , is the cost of developing or providing non-consumable parts for the product or system...

s

See also

• Cost of goods sold
  Cost of goods sold
  Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...
  
  
• EBITDA
• Profit margin
  Profit margin
  Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.Net profit Margin = x100...
  
   (the ratio of net income to net sales)
• Gross margin
  Gross margin
  Gross margin is the difference between revenue and cost before accounting for certain other costs...
  
   (the difference between the sales and the production costs)
• SG&A
  SG&A
  SG&A is an acronym used in accounting to refer to Selling, General and Administrative Expenses, which is a major non-production costs presented in an Income statement....
  
  
• Net income
  Net income
  Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...
  
  
• Income statement
  Income statement
  Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...