How to Compute Realized Gross Profit

Gross profit is the amount of profit you make after subtracting the cost of production. Realized gross profit is the gross profit you make on total sales where you have actually collected the money. Amounts of sales that have not been paid yet by customers cannot be officially realized until payment has been received. Let's say you sold a large order of widgets on installment. The contract called for the customer to pay one quarter of the total amount up front and another quarter every six months for the next 18 months. Therefore, you only realize 25 percent of the gross profit immediately, and do not realize all of it for 18 months.

Instructions

1. Determine the total amount of sales on installment during the reporting period. The total amount of installment sales is the base figure with which you calculate the gross profit margin actually realized during the period.

2. Calculate the gross profit margin on your total installment sales for the period. This is simply a matter of subtracting the cost of the sales from the total installment sales for the period. Let's say you make $500,000 total installment sales during the quarter, but your total costs were $300,000, meaning you made a gross profit of $200,000 or 40 percent.

3. Determine the amount of installment payments actually made during the quarter. Taking the example above, that would be 25 percent of the total amount of $500,000 or $125,000. The remaining $375,000 sales income for the period is deferred until the time when the monies are actually collected from the customer.

4. Calculate the realized gross profits by multiplying the total amount of installment payments actually made by 40 percent. So, continuing the example, we multiply $125,000 times .40 to end up with $50,000 realized gross profit on products sold on installment payments during this quarter.

Tips & Warnings

• The example above only calculates the realized gross profit for installment sales. All other cash sales are, of course, realized during the reporting period and 40 percent of that amount should be added to the gross profit totals.

References

• University of Idaho: Chapter 18 - Revenue Recognition [p. 20]
• Millsaps College: Intermediate Financial Accounting II Chapter 18 - Revenue Recognition [Bottom]
• University of Mississippi: Chapter 19 - Revenue Recognition [pp.3-4]