Q:

# How do you calculate gross profit?

A:

To calculate gross profit, subtract the cost of goods sold from the amount of total sales for the specified time period. The result is the pre-expense profit derived by the company, also known as the gross profit.

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1. Calculate sales

Using issued sales receipts and invoices, calculate values of the company's transactions. After going through all the invoices issued for the year, sum the values that have been calculated. The figure gives you total sales for the time period. Make sure that any and all discounts that have been given on the invoices are deducted from the total amount. Also, subtract the costs pertaining to product returns by customers.

2. Calculate the cost of sold goods

The cost of goods sold is calculated by adding together the opening inventory for the year and the amount of total purchases that have been made by the company. From the resultant sum, subtract the amount of closing inventory that is present to get the cost of goods sold.

3. Calculate the gross profit

From the sum of sales calculated in the first step, subtract the cost of sold goods obtained from the second step. Use the following formula: gross profit = sales - cost of sold goods. The result is the gross profit.

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