Gross profit
Learn what gross profit is, how to calculate it, and how it differs from net profit and gross margin.
Published Thursday 23 July 2026
Table of contents
Gross profit is what’s left after paying for the things you’ve sold to customers
Key takeaways
- Gross profit is the money left over from sales once you subtract the cost of goods sold. It shows how much your products or services earn before other expenses.
- The formula is simple: gross profit = revenue − cost of goods sold. You'll find it on your income statement.
- Gross profit is a dollar figure, while gross profit margin is that figure shown as a percentage of revenue.
- Gross profit isn't the same as net profit. Net profit takes gross profit and subtracts every other cost, including operating expenses, interest, and taxes.
What is gross profit?
Gross profit is the money left over from your sales after you subtract the cost of goods sold. It measures how profitable your core products or services are before other business costs come into play.
You'll see gross profit reported on your income statement, usually near the top and just below revenue. It gives you an early read on whether what you sell earns enough to cover the rest of running your business.
How to calculate gross profit
Working out gross profit takes two numbers: your total revenue and the direct cost of producing what you sold. The formula is:
Gross profit = revenue − cost of goods sold (COGS)
Here's how it works with a simple example:
- Add up your revenue for the period. Say your shop brought in $50,000 in sales.
- Total your cost of goods sold, such as materials and direct labour. In this case, that comes to $30,000.
- Subtract COGS from revenue. That leaves you with $20,000 in gross profit.
Gross profit vs. gross profit margin
Gross profit and gross profit margin measure the same thing in two different ways. Gross profit is a dollar figure, while gross profit margin turns that figure into a percentage of revenue.
To find your profit margin, divide gross profit by revenue and multiply by 100: gross profit ÷ revenue × 100. Using the earlier example, $20,000 ÷ $50,000 × 100 gives you a gross profit margin of 40%. The percentage makes it easier to compare performance across periods or against similar businesses.
Gross profit vs. net profit
It's easy to mix up gross profit and net profit, but they sit at different points on your income statement. The gap between them is the range of costs each one accounts for.
Gross profit is revenue minus the cost of goods sold. Net profit starts with gross profit and then subtracts all your other operating expenses, interest, and taxes. So gross profit shows how well your products perform, while net profit shows what's left for you once every cost is paid.
Why gross profit matters for your business
Gross profit is one of the clearest signals of how healthy your business really is. It feeds into decisions you make every week, from pricing to spending.
Watching your gross profit helps you set prices that cover your costs and still leave room to earn. It also flags when direct costs are creeping up, so you can act before they eat into your margins. Once you know your gross profit, you can see how much is available to cover overhead and still turn a profit.
Track your gross profit with Xero
Keeping an eye on gross profit is far easier when your sales and costs sit in one place and update in real time. With clear reports, you can spot trends early and make confident calls about pricing and spending. Sign up for Xero and get one month free.
FAQs on gross profit
Here are answers to frequently asked questions about gross profit.
What is the gross profit formula?
The gross profit formula is revenue minus the cost of goods sold. It captures only the direct costs of what you sell, not your wider business expenses.
Is gross profit the same as gross profit margin?
No. Gross profit is a dollar amount, while gross profit margin expresses that amount as a percentage of revenue, which makes it handy for comparisons.
Is gross profit the same as net profit?
No. Gross profit only subtracts the cost of goods sold, whereas net profit also subtracts operating expenses, interest, and taxes.
What is a good gross profit margin?
A healthy margin varies widely by industry, so it's most useful to compare against businesses like yours. Tracking your own margin over time often tells you more than any single benchmark.
Does gross profit include operating expenses?
No. Gross profit only accounts for the cost of goods sold, so rent, salaries, and other overhead are left out until you calculate net profit.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.