What is gross profit?

Definition

Gross profit is the leftover after you subtract the direct cost of the goods or services you sold from the sales those goods brought in. On the books, this is a subtotal on the Income Statement, not an asset and not cash in the till.

A florist who rings $800 of arrangements that cost $320 in stems and vases has $480 here. The $800 is revenue; the $320 is cost of goods sold; this line is the gap.

Cash-basis shops may feel product cost when they pay the flower vendor. Accrual books wait until the bouquet sells, and they hold unsold stems as inventory.

This leftover is a period result. It is not the cooler stock, and it is not the register balance.

Where it shows up

Balance Sheet: Related to inventory leaving as goods are sold.

P&L: Located below revenue, after cost of goods sold.

See also: Revenue · Cost Of Goods Sold · Gross Margin

When you look at your Income Statement, this leftover sits just below cost of goods sold. Revenue is above it, and rent, wages, and ads sit further down.

When the figure is high relative to sales, the shop kept more after the product cost. When it is low, the flowers were expensive, the mix was cheaper, or discounts ate the top line.

The Balance Sheet does not keep this leftover after the close. Related stock still on hand sits in inventory until the next sale.

On the Statement of Cash Flows, collecting from customers and paying vendors are the cash events. This P&L subtotal does not itself move cash.

How it works

The shop records sales when arrangements go out. Sales discounts and sales returns and allowances may reduce that top line to net revenue before this leftover is measured.

The matching product cost leaves inventory as cost of goods sold. What remains after that subtraction is gross profit.

Stay with the sold work when you read this line. Flowers still in the cooler are still inventory, not part of this leftover.

A busy wedding week can raise the dollar amount even if the shop kept a smaller share of each sale. A slow week can shrink the dollars even if each bouquet was profitable.

Operating expenses such as rent and ads sit below this line. They do not change this subtotal; they come out of it on the way to operating income.

After the close, this subtotal is part of the period's profit story. Next month starts the subtraction again from zero.

Keep the sales recap and the sold-cost support together. Anyone tying a Saturday's bouquets to this leftover should see both the ring and the flower cost.

Do not treat cash in the till as this figure. Cash can lag the sale, and the sale can sit in accounts receivable.

A high leftover with thin cash often means invoices are still open. A low leftover with a full register can mean the shop sold a lot of cheap work.

Freight that belongs on the stems can sit in the unit cost. Those extra dollars leave with the bouquet and shrink this leftover when the piece sells.

Example

A florist sells $2,000 of weekend arrangements. The roses, filler, and vases in those pieces cost $800.

Revenue is $2,000 and cost of goods sold is $800. Gross profit is $1,200 for the weekend.

If $400 of unsold stems is still in the cooler, that $400 stays on the Balance Sheet. It is not this weekend's product cost.

The shop does not need a separate journal for this subtotal. The sales entry and the sold-cost entry already produce it.

If the same weekend also had $100 of discounts, net revenue would be $1,900. The leftover would then be $1,100, not $1,200.

Common mix-ups

Gross profit is not the same as gross margin. Gross margin is this leftover written as a percentage of revenue.

Gross profit is not cash. A $1,200 subtotal can sit in unpaid invoices while the register is thin.

Gross profit is not operating income. Rent, wages, and ads still come out after this line.

Related terms

• Revenue: The total value of goods and services the business earned in a period.
• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Gross Margin: Gross profit expressed as a percentage of revenue.
• Income Statement: A statement showing revenue earned and expenses incurred over a period, ending in net income.
• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Operating Income: Profit from core operations before interest and taxes.
• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Net Revenue: Gross sales after returns, discounts, and allowances are subtracted.