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.

Gross profit can be split as well as totalled. When sales and direct costs are recorded in matching accounts for each product range, job type or location, the profit and loss statement can show a gross profit for each one. That reveals a line that sells well but earns little once its direct costs are counted, which a single combined total can hide behind stronger lines.

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.

The same guidance suggests concentrating on the customers, products or services that are most profitable, and asking suppliers for better terms, as long as a cheaper supplier does not mean a drop in quality. The business.gov.au glossary adds that margin is usually expressed as a gross margin: the share of each sales dollar that is profit.

Worked example

Illustrative example: gross profit for consecutive quarters
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.
Recording refunds and credit notes given to customers as overheads instead of as reductions in sales, which overstates both sales and gross profit.
Taking a rise in gross profit as better trading without checking whether gross margin, the share of each sale kept after direct costs, has slipped.

Common questions

What is the difference between gross profit and net profit?

Gross profit takes only the direct cost of sales away from sales. Net profit goes further, also taking away the overheads of running the business, such as rent, insurance, office wages, advertising and interest. Reading the two together shows whether a problem sits in trading or in running costs: if gross profit holds steady while net profit falls, the overheads are the first place to look.

What is the difference between gross profit and gross margin?

Gross profit is an amount: sales less the direct cost of those sales. Gross margin expresses the same result as a share of sales, found by dividing gross profit by sales for the period. The amount shows what trading contributed towards overheads, while the margin shows how much of each sale the business keeps, so it compares fairly between months with very different sales. A change in margin is a reason to look closer against your own earlier periods, not proof on its own.

How do you calculate gross profit from an income statement?

Take total sales for the period from the income statement, also called a profit and loss statement, after any returns and discounts given to customers, then subtract the cost of goods sold listed beneath them. Many layouts print the result as a gross profit subtotal before the overheads begin. If some direct costs have been posted among the overheads instead, that subtotal will be overstated.

What is the difference between gross profit and markup?

Markup is the amount added to an item's cost to set its price, while gross profit is what sales leave after their direct costs. For one item sold at full price the two amounts match, but markup is usually compared with cost and gross margin with the selling price: an item priced at double its cost has a markup equal to its whole cost and a gross profit of half its price. Discounts, returns and stock losses also leave actual gross profit below what the planned markup suggested.

Related terms

Related service

Management and cash-flow reports

Monthly reports that show where the business stands.

More about management and cash-flow reports

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.