If a company wants to determine its gross profit ^{[1]}, it would take all of the revenue ^{[2]} that is generated through the sale of products and/or services and would then subtract the cost of generating that revenue. In more simplistic terms, gross profit ^{[3]} is calculated by taking the total of all the sales and then subtracting the cost of the goods or services sold. This number tells you how much a company would make if it did not need to pay other expenses such as salary, income ^{[4]} taxes, office supplies, rent, electricity and any other costs that are associated with running a business.

If you are looking at a company’s income statement, you will see that the gross profit number is broken down into clearly labeled categories. This is due to the rules in accordance with the GAAP ^{[5]} or Generally Accepted Accounting Principles ^{[5]}. If you are looking to calculate this figure on your own, here is the exact formula. Total Revenue – Cost of Goods Sold ^{[6]} (COGS ^{[6]}) = Gross Profit.

It is important to calculate this figure of a company’s gross profit because out of the gross profit number comes the gross margin ^{[7]} figure. For example, let’s say a company sells a product that cost $300 retail. The original cost of item is actually $200 including merchant fees, service charges, bank ^{[8]} processing costs, etc. The actual profit margin ^{[9]} on the item would be $100 for each product sold. The higher the gross profit, the more money there is for the company and its shareholders.