Gross Margin/Profit
What is Gross Margin/Profit
Gross margin is the difference between sales and the cost of goods sold.
![gm1](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm1.jpg)
How it Works
A trading company will sell goods to customers.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm2.jpg)
In order to make these sales, the company will first need to buy the goods.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm3.jpg)
The amount paid for them is known as the cost of goods sold (C.O.G.S)
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm4.jpg)
The difference between sales and C.O.G.S is known as the gross margin or gross profit.
![gm19](https://seeaccountingnow.online/wp-content/uploads/2021/06/gm19.jpg)
Gross margin shows how well a trading company performs from one period to the next.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm6.jpg)
If gross margin is adequate, the company will make a good profit after paying for overheads.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm7.jpg)
However, if gross margin is inadequate, the company will make a smaller profit or even a loss after paying for overheads.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm8.jpg)
Calculating Gross Margin
To calculate gross margin, you start off by calculating how much inventory the business actually sold.
![gm9](https://seeaccountingnow.online/wp-content/uploads/2021/06/gm9.jpg)
When doing this, you don’t simply subtract purchases from sales.
![gm10](https://seeaccountingnow.online/wp-content/uploads/2021/06/gm10.jpg)
The business may have purchased more than it actually sold during the period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm11.jpg)
Or it may have purchased less.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm12.jpg)
To calculate C.O.G.S, you begin by finding how much inventory was on hand at the beginning of the period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm13.jpg)
Then you add purchases for the period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm14.jpg)
This shows the total amount of inventory available for sale.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm15.jpg)
After this, you deduct the amount of stock left over at period-end.
![gm16](https://seeaccountingnow.online/wp-content/uploads/2021/06/gm16.jpg)
The difference will show C.O.G.S
![gm17](https://seeaccountingnow.online/wp-content/uploads/2021/06/gm17.jpg)
Once C.O.G.S is determined, you can calculate gross margin.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/gm18.jpg)
To do so, you deduct C.O.G.S from sales.
![gm19](https://seeaccountingnow.online/wp-content/uploads/2021/06/gm19-1.jpg)
© R.J. Hickman 2020