How is gross profit defined in accounting?

Gross profit is defined as revenue minus the cost of goods sold (COGS). This measurement is crucial for businesses as it indicates how efficiently a company is producing and selling its products. Gross profit reflects the profitability of core operations before accounting for other expenses such as operating expenses, taxes, and interest.

When calculating gross profit, only the direct costs attributable to the production of goods sold are subtracted from total revenue. This provides insight into the primary profit-generating activity of a company, separating out costs that are not directly linked to production. Understanding gross profit helps businesses make decisions regarding pricing, inventory management, and operational efficiency.

The focus on revenue and COGS in this definition highlights the importance of both sales performance and production efficiency, making it a critical metric in financial analysis.