Definition of Gross Profit
Gross profit is defined as the remainder of sales revenue after deducting trading expenses. By trading expenses, we mean the direct expenses that are incurred in relation to the primary business activity of a business’s model. These are also called the cost of goods sold.
When we prepare an income statement the gross profit appears in the upper section of the income statement which is also called a trading account. Normally the income statement contains two parts - first, the trading section and seconds the operating section. That is why it is also called trading and profit and loss account.
The formula for gross profit is as follows:
Gross Profit = Sales Revenue – Cost of goods sold
Example of Gross Profit:
A toy store owner, who purchases toys for $500 and then resell them for $700 against cash. At this point the gross profit will be as follows:
Gross Profit = $700 - $500 = $200