Gross profit

Gross profit is the profit a business makes from its core trading activity. It is found by subtracting cost of sales from sales revenue. Cost of sales are the direct costs of the goods sold, such as materials or stock.

Gross profit = sales revenue − cost of sales. You need to memorise this formula because it is not given in the exam. Gross profit is a money amount, such as £19,000, not a percentage. It shows the core profitability of the trading activity before other operating expenses, such as rent and wages, and interest are paid.

Worked example: Harbour Cycle Repairs has sales revenue of £48,000 and cost of sales of £29,000. Gross profit = £48,000 − £29,000 = £19,000. The business kept £19,000 from its core trading after paying for the parts and stock it sold, before other operating expenses and interest.

You can rearrange the formula to find cost of sales: Cost of sales = sales revenue − gross profit. If Harbour Cycle Repairs has sales revenue of £48,000 and gross profit of £19,000, cost of sales = £48,000 − £19,000 = £29,000. This is useful when you know sales revenue and gross profit but need to work out cost of sales.