When we talk about the word profit, we usually think how much money is made for a particular activity. In the accounting world, there is more than one type of profit. In this post, our focus is to calculate the Gross Profit and related formulas.
Gross Profit is the total revenues earned by a Company when expenses are subtracted from that particular revenue amount. This amount is calculated on the classified income statement. This is obviously different from operating profits with a slight difference. This is also different from Net Profit where taxes or interests are subtracted.
To calculate the Gross profits, you should have two valuable figures. First, you should have a net sales amount for the given time period. Secondly, you should have the costs of goods sold during that particular time period. The formula for calculating Gross Profits is given as –
\[\ Gross\; Profit = Net\;Sales\;- \;Cost\;of\;Goods\;Sold \]
Let us take an example, Mac bought a clothing store. The store is always busy but he wants to know how the store is performing financially. He wants to know the Gross profits on the goods sold. There is special accounting software available to calculate the Gross Profits. In this situation, the best idea is to use Gross Profit Formula as discussed earlier.
What happens when two figures net sales and the costs for goods sold are not given? Can you still calculate the Gross Profits? Of course, this is possible. It will take more steps and time but you can find the solution in the end.
Gross Profit is the total revenue minus the cost of goods sold. We can say the Company Profit before we make the interests and tax amounts. The other name for the Gross Profit is the Gross Margin. Here, given the formula to make your calculation simpler.
This is the most common term used by businesses to calculate the total profit margin percentage over a selected time period. In the case, when net profit is divided by the sales, the final value is the profit margin. It can also be denoted in the terms of percentage. More the value, the better will be profits.
Net Profit Margin is equal to the net profits divided by the total revenues and represents the profit values for each of the dollars. Simply, the net profit is the ratio of net profits to revenue for a Company. It is typically expressed in the terms of percentage or it can be given in decimal form too.
It will show you how much dollars are earned by the Company when revenues are translated into profits. Net profit or Net income both terms have the same meaning and they can be interchangeable. The Net profit margin formula in mathematics is given by –
Normally, it is noticed that all financial statements of the Company are given in terms of percent and it may also take decimal form when used as inputs for calculations.