Gross profit is the total revenue generated by a business or financial activity less the variable costs that involve this activity. It is an accounting identity that serves as an indicator of the financial health of the business.
To understand gross profit, you need to understand what costs and revenue entail. Costs are classified in fixed costs and variable costs. Fixed costs are those costs that exist independently of production, such as electricity bills and water bills. Variable costs are those costs that involve the production process, that is, cost of items used to produce the goods.
For example, imagine a bakery. The revenue is the total received by the sale of bread. Gross profit is total revenue minus variable costs, such as wheat and labor. And net profit involves total revenue less variable costs and also fixed costs, which involve facilities, taxes, etc.
