Defined |
Gross profit is a basic measure of the profitability of the business
and it shows the return a business can make from making and selling
its products. Calculating gross profit is done in the first part
of the profit and loss account, known as the trading account. The
tricky part is calculating cost of sales.
Gross profit = sales - cost of sales
|
Cost of Sales |
Cost of sales is calculated by:
Opening stock + purchases - closing stock
Don't give yourself a headache figuring out the logic
but one explanation is that this shows us the value of the resources
used to make the products sold.
Purchases refers to the money spent on raw
materials needed.
Opening stock refers to the raw materials already
owned by the business at the start of the accounting period
that it used to make the product. It 'spent' the stock in the same
way it would spend money.
Closing stock is deducted because it is the
value of stock owned by the business at the end of the period
that has not been used to generate sales. It will most likely be
used in the next period.
|
Example |
In the example, the business had sales of £18,000 over the
year. Its cost of sales was £4,850 and its gross profit, therefore,
was £13,150.
Don't worry about the two columns, they are there to help you find
information quickly. The really important figures - sales, cost
of sales and gross profit - are on the right. The first column of
figures allows us to look in a little more detail at the cost of
sales.
Trading
Account for Filling Snacks for year ended 31 December,
2000
|
| |
|
|
£ |
|
£ |
| Sales |
|
|
|
|
18,000 |
| |
| less Cost of Sales |
|
|
|
|
|
| |
Opening Stock |
|
750 |
|
|
| |
Purchases |
|
5000 |
|
|
| |
Closing Stock |
|
(900) |
|
|
| |
|
|
|
|
(4,850) |
| |
| Gross
Profit |
|
|
|
|
13,150 |
|
|
