What Is Gross Profit?
Gross profit is what's left from a sale after you subtract what the item cost you to buy — before rent, wages, or any other overhead is considered.
Direct answer
Gross profit is what's left from a sale after you subtract what the item actually cost you to buy or make. It doesn't yet account for rent, staff wages, transport, or anything else it costs to run the business — only the direct cost of the stock itself.
This matches how gross profit is generally defined in accounting practice — as revenue less cost of sales. See the IFRS Foundation's May 2018 IASB Update for how this is discussed in international accounting standards.
Why this number matters
A shop can record ₵20,000 in sales in a month and still make surprisingly little money. The missing piece is what those sales cost the business to make happen in the first place. Gross profit is the first honest look at whether a sale actually made you money, before any of your overhead is even considered.
A hardware shop buys a padlock for ₵80 and sells it for ₵100.
| Revenue (selling price) | ₵100 |
| Cost of Goods Sold | ₵80 |
| Gross Profit | ₵20 |
The same shop's whole month: total sales of ₵20,000, against stock that cost ₵14,000 to buy.
| Revenue | ₵20,000 |
| Cost of Goods Sold | ₵14,000 |
| Gross Profit | ₵6,000 |
Common mistakes
What this number is used for
Gross profit is the input for two things that matter more day to day: your gross margin (the percentage version, which lets you compare products of different prices) and your path toward net profit once the rest of your costs are subtracted.