How to Calculate Gross Profit Rate in Accounting

The gross profit rate is a common profitability measurement used in business. The purpose for this formula is to determine how much of gross sales remain to pay operating expenses. The basic formula only requires information from the income statement. The two figures are gross sales revenue and cost of goods sold, which is the inventory costs a company incurs when selling goods or services. Another term for gross profit rate is gross margin. Companies may use different formula styles to compute this figure, although a standard formula does exist.

Instructions

1. Review the current income statement as prepared. The statement should be the official one prepared for the month's end.

2. Calculate gross profit by subtracting cost of goods sold from sales revenue.

3. Divide gross profit by sales revenue. The result is the gross profit rate for the current period.

Tips & Warnings

• Companies can apply the gross profit rate from one period to a future period. This allows a company to estimate how much gross profit they can expect to earn at different sales levels.

• The gross profit rate is a common accounting financial ratio applied to the income statement. It allows a business to benchmark its performance against the industry standard.

References

• "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011