The purpose of the functioning of any enterprise, regardless of its size or field of activity, is to make a profit. This indicator can be called one of the most important for analyzing the effectiveness of the organization. It allows you to determine how rationally its means of production and other resources are used - labor, money, material. In a general sense, profit can be viewed as the excess of revenue over costs and resources used for production. However, in the process of financial analysis, its various types are calculated. So, along with net profit, gross profit is determined. The formula for its calculation, as well as the value, differ from other types of income. At the same time, it plays one of the most important roles in assessing the effectiveness of the enterprise.
The concept of gross profit
The term comes from the English gross profit and means the total profit of the organization for a certain period. It is defined as the difference between the income received from sales and the cost of production. Some confuse it with gross income. The first is formed as the difference between the proceeds from the sale of goods and the costs associated with their production. In other words, it is the sum of net income and wages of employees. The gross profit of the enterprise, the formula of which will be discussed below, is a smaller value. It is formed after the payment of taxes (except income tax) and the deduction of labor costs. That is, not only material, but all total costs associated with production are taken into account.
Formula: Gross Profit
This value is formed as a result of the sale of all types of products and services, and also includes income from non-operating transactions. It shows the efficiency of production as a whole. Let's see how gross profit is calculated. The formula looks like this:
sales income (net) - cost of goods/services sold.
Clarifications should be made here. Net income is calculated as follows:
total sales revenue - discount rate - value of returned item.
In general, we can say that this type of income reflects the income from the transaction without taking into account indirect costs.
Gross and Net Profit
Gross profit only includes direct costs. They are determined depending on the industry in which the company operates. So, for the producer, electricity that providesthe operation of the equipment will be a direct expense, and the lighting of the room will be overhead. When net profit is determined, indirect costs are also taken into account. For its calculation, gross profit can be used. The formula is:
gross profit - management, selling expenses - other expenses - taxes.
The income received after the payment of all these payments is net and can be used for various needs of the enterprise - social, related to the development of production, etc.
Conclusion
The most important indicator of production efficiency at the enterprise is gross profit. The formula for its calculation is given in the article and reflects the total revenue received from the sale of goods or the provision of services. It is determined taking into account the direct costs of the organization and does not include indirect ones. Thus, this type of profit shows the efficiency of the use of resources directly involved in the main activities of the enterprise.
