What is gross profit?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Gross profit is the difference between a business's sales and the direct cost of making those sales, such as the stock it sold or the materials and labour that went into its products. It shows how much is left from trading to cover rent, insurance and other running costs before any net profit remains.
On a profit and loss statement, gross profit is a subtotal. It appears after the cost of goods sold has been taken from sales, and before overheads such as rent, insurance and marketing.
Because it leaves overheads out, gross profit answers a narrow question: does the business make enough on what it sells? If sales grow but gross profit barely moves, the cause is likely to sit in pricing, supplier costs or stock losses rather than in overheads. Using the same rules for what counts as a direct cost each period keeps those changes visible.
In Australia
business.gov.au defines gross profit as the difference between sales and the direct cost of making the sales. It describes the profit and loss statement as the financial statement you can use to work out a business's gross and net profit.
Its guidance on improving cash flow says that getting your prices right starts with knowing what it costs to produce your goods or services, and suggests working out how much margin you need from your sales to cover your costs.
Worked example
| Item | Jul to Sep (AUD) | Oct to Dec (AUD) |
|---|---|---|
| Sales | 52,000.00 | 58,500.00 |
| Cost of goods sold | 21,800.00 | 27,900.00 |
| Gross profit | 30,200.00 | 30,600.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Treating gross profit as the business's profit, when overheads have not yet been taken away.
- Classing a cost as direct in one period and as an overhead in the next, so gross profit figures cannot be compared.
- Working out gross profit from stock purchases instead of the cost of the stock actually sold.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Improve your cash flow
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.