What is Gross Profit?

Definition: Refers to the difference between earned revenue and the cost of making a product or producing a service. This is not equivalent to operating profit.

Cost of goods sold is deducted from net sales in order to find gross profit. This figure represents how much money there is to cover all the operating expenses (costs) prior to turning a profit.

Operating profit

Represents the earnings before interest and taxes are deducted.

Do not confuse Gross Profit with Net Income. Net Income = Gross Profit – Total Operating Expenses.

Keep in mind that Cost of Goods sold is calculated differently for merchandising and manufacturing businesses.