Gross profit is the basic figure as far as business of the company is concerned because in a way it is the first step towards company preparing final accounts. It refers to that profit which a company earns after deducting the cost of goods sold from net sales done by the company. Let’s look at gross profit calculation in detail –

## Gross Profit Formula

Gross profit formula is** Net sales – Cost of goods sold**, where net sales is calculated by deducting sales return and discounts given to customers from total sales and cost of goods sold is calculated as **opening stock of goods + purchase of raw materials during the period + direct expenses related to manufacturing – closing stock of raw materials.**

## Calculation

It can be better understood with the help of an example suppose the gross sales done by the company is $50000 out of which sales return are $5000 and discounts are $1000 then Net sales of the company will be $44000. Now the opening stock of raw materials is $20000, total purchase of raw material during the period is $30000, closing stock of raw materials is $15000 and total direct expenses like direct labor, wages and expenses and so on are $5000 then cost of goods sold is equal to $40000 which is calculated as follows – $20000 + $30000 + $5000 – $15000. Now net sales are $44000 and cost of goods sold is $40000 then gross profit of the company will be $4000.

In the above equation if any two things are given then one can calculate the third thing easily so in the above example if gross profit is given as $4000 and net sales is given as $44000 than cost of goods sold can be calculated by subtracting gross profit from net sales and it will work out to be $40000.