Definition
Gross profit is revenue minus the direct cost of producing the goods or services sold (cost of sales or COGS). It represents the margin available to cover operating expenses, interest, and tax before net profit is calculated. The gross profit line sits below revenue and cost of sales on the income statement when the function-of-expense format is used.
What gross profit means in practice
For a bookkeeper, gross profit is the first sub-total on the income statement and the most direct measure of production efficiency. It answers a simple question: after paying for the direct costs of what you sold, how much is left to fund the rest of the business?
The gross profit line is most informative when expressed as a ratio. Gross profit divided by revenue gives the gross margin. Tracking gross margin period over period catches the most common cost-creep patterns: a supplier price rise that has not been passed on to customers, a discount programme eating into margin, a shift in product mix toward lower-margin lines. Most well-run businesses watch gross margin monthly as one of three top-line health indicators (the others being revenue and operating expenses).
A practical example: a UK consultancy for the year ended 31 March 2027. Revenue 380,000. Cost of sales (subcontractors, freelance specialists, and project-specific software licences) 95,000. Gross profit 285,000. Gross margin: 285,000 / 380,000 = 75%. The 75% figure is high for professional services and reflects the consultancy’s leverage of permanent staff plus a thin layer of project-specific outsourcing. If the gross margin dropped to 60% next year, the bookkeeper would investigate whether subcontractor rates rose, project mix shifted, or pricing failed to keep up with cost inflation.
How gross profit works by country
United Kingdom
FRS 102 Section 5 requires the income statement to show revenue and cost of sales as separate lines where the entity uses the function-of-expense format. The function-of-expense format makes gross profit a sub-total on the statutory accounts. The alternative nature-of-expense format groups expenses by type (raw materials, employee costs, depreciation) and does not produce a gross profit sub-total.
Australia
AASB 101 allows both function-of-expense and nature-of-expense formats. Most AU SMBs use the function format and report a gross profit sub-total. Service businesses without inventory often combine all direct costs as “cost of services” or “direct costs”. ASIC lodgement accepts either format provided the choice is disclosed.
Canada
ASPE Section 1520 and IAS 1 both allow both formats. Canadian SMBs predominantly use the function-of-expense format with a gross profit line. The T2 Schedule 125 (the GIFI) splits revenue and cost of sales explicitly using its standardised line codes regardless of the income-statement format the entity prepares for its statutory accounts.
New Zealand
NZ IAS 1 mirrors IAS 1. Tier 1 and Tier 2 entities under the XRB framework follow the same dual-format choice; Tier 3 entities use a simplified format that may collapse gross profit into total revenue minus total expenses without a sub-total. Most NZ SMBs on Xero use the function format by default.
Singapore
SFRS(I) 1 mirrors IAS 1. Singapore SMBs predominantly use the function-of-expense format. ACRA’s XBRL filing system requires the gross profit line to be tagged separately for entities using the function-of-expense format, which simplifies the choice for filers.
Related terms
Gross profit sits in the income-statement cascade:
- COGS is the direct cost line subtracted from revenue to produce gross profit.
- Net profit is the bottom-line figure after operating expenses, interest, and tax.
- Profit margin is the ratio form (gross margin, operating margin, net margin).
- Operating expenses are subtracted from gross profit to produce operating profit.
- The income statement is the statement that displays the cascade.
- Profit and loss is the everyday synonym for income statement.
See also
For the full income-statement cascade, see the income statement entry.
FAQ
See the answered questions above for typical industry gross margins, the gross-profit vs gross-margin distinction, and service-business adaptations.